imageReport No. 46355-CN

Mid-term Evaluation of China’s 11th Five Year Plan

December 18, 2008

Poverty Reduction and Economic Management UnitEast Asia and Pacific Region

FOR OFFICIAL USE ONLY

Document of the World Bank__________________

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without written authorization from the World Bank.

CURRENCY EQUIVALENTS(As of December 18, 2008)

Currency = RenminbiCurrency Unit = Yuan (CNY)

US$1.00 = RMB 6.845

FISCAL YEARJanuary 1- December 31

WEIGHTS AND MEASURESMetric System

ABBREVIATIONS AND ACRONYMS

5YP - Five Year PlanBMI - Basic Medical InsuranceBRICs - Brazil, Russia, India, ChinaCHCs - Community Health CentersCOD - Chemical Oxygen DemandCPI - Consumer Price IndexEFA - Education for AllIVDP - Integrated Village Development ProgramLICs - Low Income CountriesMA - Medical AssistanceM & E - Monitoring and EvaluationMDG - Millennium Development GoalMEP - Ministry of Environment ProtectionMICs - Middle Income CountriesMOCA - Ministry of Civil AffairsMOF - Ministry of FinanceMOLSS/ - Ministry of Labor and Social Security/Ministry of Human Resources (MOHRSS) and Social SecurityNCH - National Commission on HealthNCMS - New Rural Cooperative Medical SystemNDRC - National Development and Reform CommissionOECD - Organization for Economic Co-operation and DevelopmentPBOC - People’s Bank of ChinaPPI - Producer Price IndexR & D - Research and DevelopmentSAT - State Administration of TaxationSO2 - Sulphur DioxideURBMI - Urban Residents Basic Medical Insurance

Vice President:Country Director:Sector Director:Task Team Leader:

Jim AdamsDavid DollarVikram NehruLouis Kuijs

Acknowledgements

This mid term review was prepared at the request of the Strategic Planning Department (SPD) of China’s National Development and Research Commission (NDRC). A summary report based on the draft executive summary was presented to the SPD in early July 2008 and a draft full report in early October 2008.

The task manager is Louis Kuijs. The evaluations were done by the following World Bank staff members: Louis Kuijs (Chapters 1 and 2), Chunlin Zhang (chapter 3); Jianping Zhao (chapter 4); Sari Söderström and Luc Christiaensen (chapter 5), Xiaoqing Yu and Minna Hahn Tong (chapter 6A), Shuo Zhang and Shiyong Wang (chapter 6B), and Liping Xiao (chapter 6C), and Andres Liebenthal and Xin Ren (chapter 7). Wanda Tseng provided much appreciated guidance and feedback on the overall evaluation approach and individual chapters and also co-authored the Executive Summary. Andres Liebenthal also gave valued guidance to the overall evaluation approach.

Skillful research assistance was provided by Chenjie Liu and Gao Xu. Jianqing Chen provided crucial assistance and formatted and compiled the report. Li Ouyang provided crucial assistance throughout the project.

Several consultants provided welcome inputs and background information for several of the chapters, including Jianlong Yang, Research Fellow at the Development Research Center of the State Council (Chapter 3), Professor Lin Wanlong, China Agricultural University (Chapter 5), who also commented on the main text. For Chapter 6, helpful information gathering was done by Rong Mo, Shaomin Cui, Qinyi Yu on social protection, Dai Tao on health and Ping Zhu on education.

Valuable comments and advice were provided at different stages by many collegues and other people. Special thanks go out to Deepak Bhattasali, Vivek Arora, and Shantong Li, who were peer reviewers of the concept note, and Pieter Bottelier, Nicholas Hope, and Shahid Yusuf, who were peer reviewers of the main report. Messrs. Bottelier and Hope also gave much appreciated comments on the Executive Summary. DG Xu Lin of the NDRC is thanked for valuable insight and guidance. Ardo Hansson gave much appreciated comments.

Vikram Nehru, Sector Director and Acting Chief Economist, East Asia and Pacific Region, and David Dollar, Country Director for China, provided overall guidance.

Mid-term Evaluation of China’s 11th Five Year Plan

Table of Contents

Executive Summary............................................................................................................i

1. Introduction................................................................................................................1SITUATION AND DEVELOPMENTS PRIOR TO THE START OF THE 11TH 5YP........................................1THE 11TH 5YP.....................................................................................................................................6

2. Stable Operation of the Macro Economy and Improve Living Standards....................................................................................................................10

SITUATION AND DEVELOPMENTS PRE 11TH 5YP..............................................................................10KEY OBJECTIVES IN THE 11TH 5YP ON “STABLE MACRO ECONOMY”.............................................11KEY INITIATIVES AND DEVELOPMENTS...........................................................................................11HOW HAVE MACRO POLICIES EVOLVED DURING THE 11TH 5YP?...................................................15EMERGING ISSUES AND ASSESSMENT..............................................................................................17

3. Optimizing and Upgrading of the Industrial Structure...........20BACKGROUND AND KEY OBJECTIVES..............................................................................................20PROGRESS WITH THE TASKS OF THE 11TH 5YP...............................................................................22PROGRESS IN MEETING THE OVERALL TARGETS OF THE 11TH 5YP...............................................26SOUNDNESS OF THE INDUSTRIAL STRUCTURE — HOW TO MEASURE PROGRESS OVER TIME?......28CONCLUDING REMARKS..................................................................................................................33

4. Increasing Energy Efficiency..................................................................................35BACKGROUND AND KEY OBJECTIVES..............................................................................................35MAIN INITIATIVES............................................................................................................................38KEY RESULTS ACHIEVED SO FAR....................................................................................................43CONCLUSIONS AND LESSONS...........................................................................................................46RECOMMENDATIONS........................................................................................................................48

5. Coordinating Urban and Rural Development......................................................51BACKGROUND AND KEY OBJECTIVES..............................................................................................51MEASURES TAKEN AND KEY RESULTS............................................................................................53EMERGING THEMES AND RECOMMENDATIONS...............................................................................67

6. Improving Basic Public Services............................................................72A. SOCIAL PROTECTION................................................................................................................72

BACKGROUND AND KEY OBJECTIVES......................................................................................72OVERALL PROGRESS, MAIN INITIATIVES, AND KEY RESULTS.................................................74ANALYSIS OF RESULTS, CONCLUSIONS, AND MAIN CHALLENGES AHEAD..............................84

B. HEALTH SERVICES..................................................................................................................87BACKGROUND AND KEY OBJECTIVES......................................................................................87MAIN INITIATIVES AND OVERALL PROGRESS TO DATE...........................................................89FACTORS AFFECTING THE ACHIEVEMENT OF THE OBJECTIVES...............................................98CONCLUSIONS AND LESSONS LEARNED.................................................................................100

C. EDUCATION DEVELOPMENT...................................................................................................102BACKGROUND AND KEY OBJECTIVES....................................................................................102IMPLEMENTATION STATUS OF MAIN TASKS..........................................................................103

CONCLUSIONS.........................................................................................................................108

7. Building a Resource Efficient and Environmentally Friendly Society.............111REDUCING AIR, WATER AND SOLID WASTE POLLUTION..............................................................111WATER RESOURCES EFFICIENCY AND SAFETY..............................................................................119FORESTRY AND ECO-SYSTEM PROTECTION...................................................................................122CONCLUSIONS AND LESSONS.........................................................................................................126

References........................................................................................................................130

FiguresFigure 1 China’s GDP Per Capita Growth Has Been Very Rapid...................................................................iFigure 2 This Has Allowed China to Catch up with Other Countries..............................................................iFigure 3 China’s Capital-Intensive, Industry-led Economy in International Perspective 1/.........................iiiFigure 4 Industry Still Outpaces Services.....................................................................................................viiFigure 5 Investment Still Outpaces Consumption.........................................................................................vii

Figure 1.1 China’s Growth Performance is in a League of its Own...............................................................2Figure 1.2 Human development also progressed............................................................................................2Figure 1.3 China’s Capital-Intensive, Industry-led Economy in International Perspective 1/........................4

Figure 2.1 Potential Growth Broadly Keeps Pace with Actual Growth........................................................12Figure 2.2 Overall Growth Target Seems in Easy Reach..............................................................................12Figure 2.3 The Rise and Fall of Food Price Driven Inflation........................................................................14Figure 2.4 Although a Price-Wage Spiral is is Unlikely, Wage Growth has Remained Robust..................14

Figure 3.1 Share of Value-Added of Hi-Tech Industries in GDP, Realized and Targeted, 1995-2010...23Figure 3.2 Percentage Shares of the Tertiary Industry in GDP and Total Employment, Realized and

Targeted, 2000-2010.....................................................................................................................27Figure 3.3 R&D Expenditure as Percentage of GDP, Realized and Targeted, 1995-2010...........................27Figure 3.4 Labor Productivity in China’s Industry, 1998-2006....................................................................30Figure 3.5 Capital Intensity in China’s Industry 1/.......................................................................................30Figure 3.6 Return to capital of Chinese Industrial Enterprises, 1998-2007..................................................31Figure 3.7 Return to capital of Industrial SOEs and Non-SOEs (above cut-off scale), 1998-2007..............31Figure 3.8 Growth of Fixed Assets, Output and Employment of Chinese Industrial Enterprises, 1998-2006........................................................................................................................................................................32Figure 3.9 Growth of Fixed Assets, Output and Employment of Chinese Industrial SOEs (left) and Non-

SOEs (right), 1998-2006..............................................................................................................32

Figure 4.1 Oil price and domestic gasoline prices........................................................................................41

Figure 5.1 Grain Production has risen to levels of the late 1990s with a slowdown since 2004..................64Figure 5.2 Changes in cereal Land Allocation have dominated the decline (before 2004) and the increase

(after 2004) in cereal production..................................................................................................64Figure 5.3 Sub-Sector Share of Agriculture..................................................................................................64Figure 5.4 Rural income per capita growth accelerated further since 2005..................................................65Figure 5.5 Urban income per capita growth was consistently higher, widening the gap..............................65Figure 5.6 Growth in agricultural GDP, agricultural prices, and agricultural output...................................65Figure 5.7 Growth of agricultural input and output prices............................................................................66Figure 5.8 Urbanization.................................................................................................................................66Figure 5.9 The Rural-Urban Income Gap......................................................................................................66

Figure 6.1 Construction of National Total Health Expenditure....................................................................99

Figure 6.2 Improvements in Life Expectancy and IMR Reduction in........................................................101

Figure 7.1 SO2 Emissions - 20 Most Polluted Cities..................................................................................112Figure 7.2 Monitored COD Discharge in China.........................................................................................113Figure 7.3 SO2 Emission in China..............................................................................................................113Figure 7.4 Comprehensive Utilization of...................................................................................................113Figure 7.5 Forest Coverage in China...........................................................................................................123

TablesTable 1 China's Progress in Meeting the Quantitative Indicators under the 11th 5YP....................................viTable 2 Indicators on the Macro Economy and Living Standards................................................................viiTable 3 Social Indicators.................................................................................................................................xTable 4 Environmental Indicators..................................................................................................................xi

Table 1.1 China in 2005 According to the 11th 5YP Indicators.......................................................................3Table 1.2 China’s 11th Five Year Plan.............................................................................................................7Table 1.3 China's Progress in Meeting the Quantitative Indicators under the 11th 5YP.................................9

Table 2.1 Macroeconomic Developments (2000-2005)................................................................................10Table 2.2 Main Macroeconomic Indicators...................................................................................................13Table 2.3 Per Capita Household Incomes (growth, in percent)....................................................................15

Table 3.1 Changes in the Shares of Tertiary Industry in GDP and Employment.........................................27Table 3.2 China’s R&D Expenditure by Source of Funding, 2003-2006.....................................................28Table 3.3 Labor Productivity in China’s Industry, an International Comparison.........................................29

Table 4.1 Provincial Energy Intensity Reduction Targets during the 11th 5YP Period...............................37Table 4.2 Tax Rate Change for Selected Products (in percent)....................................................................43Table 4.3 Quarterly Energy Intensity Rate in 2006 and 2007.......................................................................43Table 4.4 Growth of Key Energy Intensive Products....................................................................................44Table 4.5 Change in (Net) Export of Key Products......................................................................................44Table 4.6 Closing Down of Inefficient Production Capacity........................................................................45Table 4.7 Primary Energy Consumption (Mtce)...........................................................................................46Table 4.8 Efficiency Improvement of Key Products.....................................................................................46Table 4.9 Energy Intensity Reduction (EIR) of Key Industries in 2007.......................................................46

Table 5.1 11th 5-Year Program Target Indicators for the Balanced Rural-Urban Development...................52Table 5.2 Budgeted Central Government Spending on Agriculture and Rural Areas..................................53Table 5.3 Government Programs Supporting Agricultural Production.........................................................54Table 5.4 Central Government Spending on Agriculture..............................................................................55Table 5.5 Agricultural Subsidies...................................................................................................................55Table 5.6 Programs Supporting Agricultural Modernization........................................................................56Table 5.7 Labor Mobility Programs Are Strengthened.................................................................................59Table 5.8 Targeted Poverty Reduction Projects............................................................................................59Table 5.9 Central Government Funding for Poverty Reduction...................................................................60Table 5.10 NDRC Investments in Rural Infrastructure.................................................................................62Table 5.11 Achievements as of 2007 of the Major Relevant Target Indicators............................................63Table 5.12 Budgeted Central Government Spending on Agriculture and Rural Areas................................67

Table 6.1 Social Protection - 11th 5YP Targets and Progress at Mid-Term..................................................74Table 6.2 Indicators for Urban and Rural Dibao, 2005-2007.......................................................................79Table 6.3 Major Indicators on Disease Control.............................................................................................88Table 6.4 Health Protection - Targets and Progress......................................................................................89Table 6.5 Progress Indicators on NCMS.......................................................................................................90

Table 6.6 Indicators on MA...........................................................................................................................92Table 6.7 Total Government Expenditure and Spending on Health.............................................................96Table 6.8 Central Government Health Spending(RMB billion)...................................................................98Table 6.9 No. of Documents and Programs Launched in 2006-2007.........................................................103Table 6.10 Key Indicators for Compulsory Education................................................................................104Table 6.11 Key Indicators of Vocational Education...................................................................................106Table 6.12 Key Indicators of Higher Education..........................................................................................107Table 6.13 Inputs and Outputs.....................................................................................................................107

Table 7.1 The 11th 5YP Targets and Progress Related to Pollution Reduction...........................................116Table 7.2 Target and Progress Regarding Industrial Solid Wastes (billion tons).......................................116Table 7.3 Water Use Per Unit of Industrial Value-Added..........................................................................119Table 7.4 The 11th 5YP Targets and Progress Related to Water Resources..............................................121

AnnexesAnnex 1: Overview of Structure of the 11th 5YP........................................................................................132Annex 2: Monitoring and Evaluation Framework......................................................................................137Annex 3: Progress in Implementing the 11th 5YP: Summary Results for 45 Tasks of Chapter 10, 11 and 13 ......................................................................................................................................................................138Annex 4: “New Socialist Countryside”.......................................................................................................151Annex 5: NDRC Investments in Agriculture and Rural Development.......................................................152Annex 6: Labor Mobility Programs and Interventions................................................................................155Annex 7: China 11th Five-Year Program Key Policies and Regulations in Social Protection (2005-2008)......................................................................................................................................................................156Annex 8: Urban Pension System in China: Summary of Major Policy Changes......................................158Annex 9: China 11th 5YP: Key Policies on Health (2005-2008)...............................................................159Annex 10: Key Educational Indicators in 2006..........................................................................................163Annex 11: Key policies and regulations in China Related to Resources and environment objectives in

China’s 11th Five Year Plan........................................................................................................164

Executive Summary

Situation Prior to 11th 5YP

1. When the 11th Five Year Program (5YP) was formulated in 2003-05, China had enjoyed an extended period of rapid economic growth, poverty reduction, and increasing integration with the global economy. Since the onset of economic reforms and opening up three decades ago, China’s economic growth had been in a league of its own, surpassing that of low income countries (LICs), middle income countries (MICs), and other BRICs (Brazil, Russia, and India) (Figures 1 and 2). GDP growth had averaged about 10 percent per year, with reduced volatility and generally low inflation from the mid-1990s. Poverty had fallen sharply on all definitions; on the cost-of-basic needs benchmark, poverty had declined from 65 percent of the population in 1981 to about 7 percent in 2005, lifting hundreds of millions out of poverty at an unprecedented rate. China had also integrated swiftly into the global economy via trade and foreign direct investment, culminating in China’s accession to the WTO in 2000.

2. Reforms also increased the market orientation of China’s economy. The role of the private sector and market mechanisms expanded steadily, while direct government control over economic activity diminished. Product and factor markets gradually became more integrated. One exception was the financial sector, where reforms lagged and all major banks remained state-owned, dominating the financial system. But even here progress was marked. The government had recapitalized the major state banks, invited strategic partners, raised funding in capital markets, improved the supervisory and regulatory framework, and aimed at reforming internal management and controls. And, in parallel, capital markets were expanded and deepened. Finally, fiscal revenues, which had been pressured during the early years of reforms, had recovered since the mid-1990s.

Figure 1 China’s GDP Per Capita Growth Has Been Very Rapid

Figure 2 This Has Allowed China to Catch up with Other Countries

i

Source: World Development Indicators, WB

Source: World Development Indicators, WB3. Despite – or perhaps as a result of -- these achievements, the attention of policy makers focused increasingly on growing economic and social imbalances that emerged as a result of China’s rapid growth. These imbalances included:

Heavy reliance on investment and exports for economic growth, at the expense of domestic demand, especially consumption. This was reflected in a large and growing external current account surplus that reached 7 percent of GDP in 2005.

Domination of industry, especially heavy industry, over the services sector (services make up 40 percent of GDP in China, compared with an average 54 percent in middle income countries and 70 percent in high income countries).

Rapid increases in the demand for energy and other resources. China’s primary energy consumption grew by 62 percent during 2000-05 largely because of its capital-intensive, industry-led growth. China’s energy intensity also climbed, reversing a trend decline since the start of market reforms. By 2005, it was 43 percent higher than in India and 73 percent higher than in the U.S., based on PPP GDP. Excessive withdrawal of water from surface and underground resources caused acute water scarcity in the northern plains.

ii

-10

-5

0

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30

1980 1984 1988 1992 1996 2000 2004

ChinaLower income countriesMiddle income countriesOther BRICS

Growth(percent yoy)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

1980 1984 1988 1992 1996 2000 2004

ChinaLower income countriesMiddle income countriesOther BRICS

GDP per capita 2000 US$

Widening disparities in regional development and incomes, between urban and rural areas and coastal and inland provinces.

Pronounced unevenness in access to basic public services between urban and rural areas. Social protection remained inadequate, especially for vulnerable groups including large numbers of rural-urban migrants. Access to education was uneven between urban and rural areas; the health system was poorly developed in rural areas, and there was a general lack of access to affordable health care.

A mixed record in the improvement of environmental quality. While air quality had improved in many cities, and water quality had improved in the south, overall emissions of key pollutants had increased, as has the production of solid waste. China is now home to 13 of the world’s 20 most polluted cities. Land use patterns created tensions among the conflicting demands of urbanization, farmers’ income, and environmental protection.

4. In no small part, these imbalances were an outcome of China’s capital-intensive, industry-led pattern of growth (Figure 3). China’s growth had been capital intensive, with the investment to GDP ratio rising to almost 43 percent in 2005 and—using growth accounting—capital accumulation accounted for over 60 percent of GDP growth during 1993-2005. From a sectoral perspective, China’s growth was driven especially by industry, which during 2003-2005 accounted for over 60 percent of all GDP growth. The burgeoning profits of industrial firms, together with cheap credits from state banks, were invested in additional capacity. Industrial growth was associated particularly with increases in labor productivity, less so with employment growth, reflecting in part labor shedding by SOEs. Moreover, with industry taking the lead, service sector development lagged (the share of services in GDP was 40 percent in 2005, compared to an average of 54 percent in middle income countries and 70 percent in high income countries). As a result, urban employment growth, while robust, was not as high as it could have been, given China’s rapid overall growth.

Figure 3 China’s Capital-Intensive, Industry-led Economy in International Perspective 1/

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5. This capital-intensive, industry-led pattern of growth was a key driver of the imbalances outlined above. First, the capital-intensive, industry-led growth had been particularly intensive in energy, natural resources, and environmental degradation, thus accentuating the associated imbalances noted above. While energy and natural resource intensity was declining in several sectors, the relatively rapid growth of industry increased the weight in GDP of the most energy and resource intensive sectors. Second, capital-intensive growth created fewer jobs than a services-led growth pattern, limiting the absorption of surplus agricultural labor and contributing to the rising rural-urban income inequality and rural poverty noted above. Third, capital-intensive growth resulted in a declining share of wage income in GDP—a key driver of the declining share of consumption in GDP, the rising share of investment, and a ballooning external current account surplus.

6. Government policies helped accentuate China’s capital-intensive, industry- and export-led growth pattern. Thus, while serving the economy well in several regards, policies indirectly accentuated the imbalances noted above. Policies encouraged saving and investment, with government spending geared to investment in physical infrastructure more than health and education, and biased to richer, coastal areas. Industrialization was promoted via easy access to cheap credit for large industrial firms, as well as by underpricing key inputs, including capital，energy, natural resources, land, and the environment. The reluctance to move to greater exchange rate flexibility and

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35

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45

10 20 30 40 50 60

Share of industry in value added (percent)

Investment over GDP ratio (percent)

Thailand

South Korea

US Indonesia

Japan (1980)

Malaysia (1970)

Malaysia (1980)

Malaysia (1990)

Malaysia

Japan

Japan (1990)

Malaysia (1960)

India (2005)

China (2005)

Sources: World Development Indicators, NBS (for China), and staff estimates.1/ 2001, unless otherwise indicated.

South Korea (1990)

allow the exchange rate to appreciate further stimulated exports and industry. The priority accorded to industry meant that services lagged. The hukou system restricted rural-urban migration and limited access to urban public services for migrants, further accentuating capital intensity, but at the same time dampening the rate of urbanization and avoiding the formation of urban slums.

The 11th 5YP: A Turning Point in China’s Development Strategy

7. The 11th 5YP reorients policies to correct these imbalances. In a major shift from previous plans which had quantitative growth as the dominant objective, the 11 th

5YP gives priority to rebalancing the economic structure as well as to environmental and social objectives. It recognizes that economic, environmental, and social objectives are intertwined. The guiding principles and policy orientation seek to rebalance China’s growth pattern, with domestic demand, especially consumption, as the main driver, and services as the leading sector. This, in turn, is expected to better balance economic growth with resource conservation, energy efficiency, and environmental protection. Moreover, rebalancing the pattern of growth is expected to help mitigate the urban-rural divide, promote more balanced regional development, and improve basic public services, especially social protection, health, and education. To meet these objectives, the 5YP sets out 15 main tasks and strategic priorities, which in turn are supported by 22 quantitative benchmarks, of which 8 are obligatory and 14 are anticipative. A three-tier monitoring and evaluation framework was developed with a large number of quantitative indicators, although this does not seem to be operational yet. The overarching goal is to deliver a more people-centered growth and development that is more sustainable and equitable, thereby creating a more “harmonious society.”

Implementation of the 11th 5YP: Progress to Date

8. This mid-term review has been undertaken to assess progress in the implementation of the 11th 5YP during its first two years and a half, draw preliminary lessons, and make recommendations for policy adjustments. The review examines the following strategic objectives: ensuring the stable operation of the macro economy and improving living standards; optimizing and upgrading of industrial structure; increasing energy efficiency; coordinating urban and rural development; improving basic public services; and enhancing sustainable development.

9. During the implementation of the 11th 5YP, China has been buffeted by various exogenous shocks. Domestically, natural disasters—the severe storms last winter and the recent massive earthquake in Sichuan—took a heavy toll. Externally, global demand has slowed owing to the slump in the U.S. housing market and the related credit crisis and increased risk aversion. International oil, food, and other commodity prices have soared. These developments pose new challenges. But they also reinforce the appropriateness of the policy priorities of the 11th 5YP to increase the economy’s resilience and ensure sustainable growth.

10. The 11th 5YP overall provides useful guidance to policy makers. The

v

objectives and tasks set out in the 5YP are consistent with China’s development challenges and government priorities Moreover, the quantitative indicators generally accord well with the overall guiding principles, orientations, and objectives, suggesting that these have been successfully put into operation.

11. Many policies, programs, and regulations have been put in place recently to achieve the plan’s objectives. These include high-level political directions, broad strategies, specific administrative and policy measures, as well as the establishment of new institutions, regulations, and standards. On the whole, these measures were comprehensive and relevant to the objectives.

12. Progress toward achieving the major objectives of the 11th 5YP has varied (Table 1).

Economic growth has far exceeded expectations.

Considerable progress has been made toward the 5YP’s most important social objectives: improving basic public services in social protection, education, health, and conditions in rural areas (even though income disparities between rural and urban areas continue to widen).

Progress on the environmental objectives has been mixed: insufficient progress has been made in reducing energy intensity, but improvements were seen in reducing air and water pollution, treating industrial solid waste, increasing the efficiency of water use, and expanding forest coverage.

13. Broadly speaking, the progress achieved so far can be attributed to several key factors. These include a high level of political commitment, generally adequate administrative capacity to roll out new initiatives rapidly, strong public support for the objectives, an adjusted accountability system that links implementation to performance assessment of local officials, and increased central funding. The policy measures introduced were comprehensive and relevant to the objectives.

14. However, little progress has been made in rebalancing the overall pattern of growth, which has in turn limited progress on other key objectives. There has been little rebalancing away from industry and investment towards services and consumption. This, in turn, has made it difficult to meet the objectives on energy efficiency, the environment, and reducing the external imbalance. The lack of decisive rebalancing has also made further widening of urban-rural income inequality almost unavoidable, despite strong government efforts. Going forward, rebalancing would help meet these objectives and solidify the social gains that have been achieved. The policy agenda for rebalancing is broad ranging, involving macroeconomic policy adjustments and structural reforms, as discussed below.

Table 1 China's Progress in Meeting the Quantitative Indicators under the 11th 5YP

vi

2005 2007 2010 Type ofCategory Indicator actual actual target Target 1/Economic GDP (RMB trillion) 18.4 25.0 26.1 Agrowth GDP per capita (RMB) 14,103 18,885 19,270 A

Share of services in GDP (%) 39.9 40.1 43.3 AEconomic Share of services in total employment (%) 31.4 33.2 35.3 AStructure Ratio of R&D expenditures to GDP (%) 1.2 1.4 2.0 A

Urbanization Rate (%) 43.0 44.9 47.0 ATotal Population (100 mln) 13.1 13.2 13.6 OReduction of energy use per unit of GDP (%) 0 4.6 2/ 20.0 3/ OReduction of water use per unit of industrial VA (%) 0 … 30.0 3/ O

Population, Efficiency coefficient of irrigation water 0.45 0.46 4/ 0.50 Aresources, Compreh. utiliz. rate of industrial solid waste (%) 56.1 61.2 60.0 Aand Total cultivated land (mln ha.) 122.1 121.7 4/ 120.0 Oenvironment Reduction of total major pollutants emission (%)

COD na 2.1 2/ 10.0 3/ O SO2 na 3.2 2/ 10.0 3/ OForest Coverage (%) 18.2 … 20.0 OAverage number of years of schooling (yr) 8.5 … 9.0 A

Public Population covered by basic urban pension (100 mln) 1.7 2.0 2.2 OServices Coverage new rural coop. health system (%) 75.7 85.7 80.0 Oand New urban employment in five years (mln) 45 AQuality Rural labor force transferred in five years (mln) 45 Aof Registered urban unemployment rate (%) 4.2 5.0 ALife Per capita disp. income urban households (RMB) 10,493 13,790 13,390 A

Per capita net income rural households (RMB) 3,255 4,140 4,150 ASources: China's authorities, NBS, and staff estimates.1/ A = Anticipated; O = Obligatory2/ accumulated reduction in 2006-073/ Targeted accumulated reduction in 2005-104/ 2007 data not yet available. This is the 2006 data.

Looking more specifically at the major objectives of the 11th 5YP:

Stable Operation of Macroeconomy and Improved Living Standards

15. China has broadly succeeded in combining rapid growth with low inflation. During 2005-07, GDP growth accelerated to nearly 12 percent annually and per capita income growth rose rapidly in urban and rural areas even as the gap between rural and urban incomes widened (Table 2). But little progress was made in rebalancing the underlying drivers of growth, which on the sectoral side continued to be industry, and on the demand side, investment and exports (Figures 4 and 5). The labor-intensive services sector continued to lag behind industry, but with overall economic growth so strong, urban job creation remained robust. Preliminary data indicate strong poverty reduction in the first 2 years of the 11th 5YP period. China is affected by the global financial turmoil and slowdown, with growth in end-2008 and early 2009 expected to be particularly weak. However, the medium-term growth outlook remains good and the 11th 5YP’s objectives for overall and per capita income growth will likely be achieved.

Table 2 Indicators on the Macro Economy and Living Standards

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  2005 2006 2007 2008 WB 1/Real GDP (production side) 10.4 11.6 11.9 9.4Consumer prices (period average) 1.8 1.5 4.8 6.5Fiscal balance (% GDP) -1.2 -0.5 0.7 -0.4Current account balance (% GDP) 7.1 9.5 11.3 9.3Real urban p.c. income (%) 9.6 10.4 12.2 …Real rural p.c. income (%) 6.2 7.4 9.5 …Source: NBS, SAFE, Ministry of Finance.1/ World Bank Forecast, December 2008.

16. Since early 2007, headline inflation has climbed as a result of sharply rising international and domestic food prices. The impact of higher international oil prices on inflation has so far been muted due to price controls, even with an increase in fuel prices in June 2008. In mid 2008, headline inflation started to recede as food prices stopped rising. Some spillover of the initial food price hikes is taking place and additional pressure from surging oil and commodity prices is in the pipeline. On balance, headline inflation should continue to recede. However, there is a risk that inflation expectations increase. This risk is compounded by the conduct of monetary and exchange rate policy. In the face of large balance of payment surpluses, in part due to speculative inflows, the limited flexibility of the exchange rate regime constrains the independence of monetary policy and real interest rates are negative.

Figure 4 Industry Still Outpaces Services(constant prices)

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Figure 5 Investment Still Outpaces Consumption(constant prices)

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17. A visible reflection of China’s macroeconomic imbalances is the current account surplus, which climbed to over 11 percent of GDP in 2007, approaching 0.75 percent of global output. The trade surplus declined in the first 5 months of 2008 from its level a year ago because of a large deterioration in the terms of trade as raw material prices soared. In constant prices, though, net external trade continued to contribute to GDP growth even as the world economy slowed. The large external surplus reflects the lack of progress in rebalancing the overall pattern of growth. Exchange rate developments have been an important factor limiting this progress, although, as noted,

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many elements of the policy setting have played a role, including the pricing of inputs and capital for industry, fiscal policy, and financial sector policies.

18. China’s exchange rate has gradually appreciated. Since July 2005, the exchange rate of the RMB has been set with reference to a basket of currencies, and it has appreciated almost 21 percent against the U.S. dollar up to November 2008. The U.S. dollar, however, has depreciated against most of world’s major currencies during this period, despite strengthening in recent months. As a result, on a trade-weighted basis, the RMB’s appreciation has been more limited since July 2005, at 15 percent. At the same time, productivity growth in China’s manufacturing industry has continued apace, implying a strengthening of the equilibrium exchange rate.

Optimization and Upgrading of Industrial Structure

19. There is mixed progress in meeting the overall objectives in the area of industrial structure. The targets on the share of total employment in the service sector and R&D are within reach. However, given recent trends, it seems unlikely that the target to raise the share of the service sector in GDP can be met. Instead, during the first two years of the 11th 5YP, industry continued to outpace the services industry. Within the industrial sector, energy-intensive heavy and chemical industries (such as steel and aluminum) gained further importance. These developments have made achieving the objectives on energy efficiency and environmental quality more difficult to achieve.

20. The industry-specific agenda to upgrade the industrial structure appears to be on track. While it is difficult to measure progress in this area, the tasks the Government set on industrial upgrading are being carried out: accelerating the development of high tech industries; revitalizing equipment manufacturing industries; and adjusting the structure and spatial layout of raw materials industries. Industrial upgrading has involved a strong role for government in resource allocation, in the form of investment licensing, access to land and financial resources, and various administrative measures.

21. Whether carrying out the industrial agenda actually improves the economic and industrial structure is open to question. This is because it is difficult to assess whether setting and carrying out a detailed agenda for industrial structural changes yields optimality in an increasingly market-oriented economy. With the increased market orientation of China’s economy, industrial upgrading is best pursued by measures that encourage innovation such as improved IPR, venture capital markets, better governance of SOEs, and greater access of private firms to capital markets.

22. Overall quantitative indicators generally suggest continued improvements in the performance of the industrial sector. This is evident in the continued rapid growth in labor productivity and catch up with high income countries during the first two years of the 11th 5YP. The productivity improvements and upgrading boost China’s international competitiveness. Judging from continued increases in China’s global market share, this competitiveness position is strong. In addition, measures of the return on

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capital have continued to improve for both SOEs and non-SOEs. However, SOEs continue to show considerably higher capital intensity (the amount of capital per worker), with lower rates of return on capital, employment creation and labor productivity growth than non-SOEs.

Increasing Energy Efficiency

23. China’s energy intensity (the amount of energy per unit of output) has been reduced, but by much less than needed to achieve a 20 percent reduction by 2010. At the start of the 11th 5YP, energy intensity reversed an upward trend exhibited since 2002. However, the extent to which this can be sustained is questionable. This is because the reduction in energy intensity seems to be mainly at the sectoral rather than the macro level. At the sectoral level, higher energy efficiency has been achieved in specific products. However, capital-intensive and high energy using industries continue to grow more rapidly than other parts of the economy. That is because the overall pattern of growth and the policies underlying it, including the pricing of energy and other resources, remain broadly unchanged. Looking ahead, the efficiency gains from technical upgrading and closure of inefficient capacity will become harder to tap in the future. Without rebalancing the pattern of growth and the economic and industrial structure, it is unlikely that the 20 percent reduction target in energy intensity could be achieved. Raising energy prices would likely be most effective in promoting energy efficiency and contributes to rebalancing. It is equally important to put in place the policies and the institutional, regulatory, technical, and financial framework and capacity to sustain China’s efforts to transform to more energy efficient economic growth.

Coordinated Urban and Rural Development and Improving Basic Public Services

24. The first two years of the 11th 5YP have witnessed substantial social progress. Government spending on rural issues is budgeted to increase from 1.6 percent of GDP in 2005 to 2.0 percent of GDP in 2008. Conditions in rural areas improved significantly. The targets relevant to balanced rural-urban development in the 11th 5YP, including the coverage of the new rural cooperative medical services, farmland retention, and per capita income of rural residents, will likely be met (Table 3). Four policy initiatives during the 11th 5YP have been instrumental in improving farmers’ incomes and living conditions: (i) the abolishment of agricultural taxes and fees in 2005; (ii) introduction of free compulsory education in the countryside; (iii) the introduction of the rural cooperative medical insurance schemes; and (iv) the extension of the minimum living standard allowance.

Table 3 Social Indicators

2005 2007 2010 Percent      target completed

Basic urban old age insurance contributors (millions) 175 201 223 54No. of beneficiaries rural dibao (millions) 8.3 34.5 … …No. of counties with NCMS (percent) 1/ 22 86 80 2/ > 100No. of beneficiaries rural Medical Assistance(millions) 11.1 35.7 … …Source: MOLSS, Civil Affairs Yearbook, MOH, MOE.1/ New Rural Cooperative Medical System (health insurance).

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2/ The target was recently revised to 100 percent.

25. Considerable progress has also been made to improve public services in the areas of social protection, education, and health. This is based on strong government effort and significant progress in rolling out various initiatives. While there are still important design issues in need of reform, achieving the targets for the social objectives laid out in the 11th 5YP is on track, or even ahead of schedule in some cases:

China is on track to meet the targets for expanding basic urban pensions, unemployment insurance, work injury insurance, maternity insurance, and rural dibao program (a poverty gap program for the poorest rural residents). Having achieved this impressive progress, attention can now focus on several design issues with the framework for social protection.

The targets for health protection and major disease prevention and control are also being realized ahead of schedule. All counties nationwide are expected to be covered by the new rural cooperative medical system by end 2008. Basic medical insurance for urban residents and employees is also expanding rapidly. A medical assistance system now covers all rural counties; good progress is also being made on introducing medical assistance in urban areas. Building on this rapid expansion of health protection, the government could usefully turn to some design issues.

In the priority areas of education, targets for expanding free compulsory education nationwide, as well as for scale and system development of vocational and higher education will be achieved ahead of schedule.

26. At the same time, the challenge of how to distribute the benefits of rapid economic development more equitably remains. This is because while conditions are improving in rural areas, they are improving even faster in urban areas. Despite a massive increase in financial support in rural areas, with central government spending on agriculture and rural areas rising by 75 percent during 2005-07, the gaps in income and quality of life between the urban and rural areas continue to widen.

Enhancing Sustainable Development

27. Preliminary indications are that China has made progress toward a more resource efficient and environmentally sound economy. The unrelenting increase in air and water pollution discharges over the past decade appears to have been reversed during the past two years, indicating progress toward the target reduction of SO2 and COD emissions by 10 percent during the 11th 5YP, although meeting the target may be difficult (Table 4). The share of industrial solid waste that is treated has been raised. The efficiency of water use in irrigation and the industrial value added per unit of water consumed have increased, but the reduction in water intensity in industry by 30 percent remains a difficult goal. Forest coverage has steadily expanded, although the timetable for reaching the 20 percent target may have been set back somewhat by the recent severe winter.

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28. Nevertheless, immense environmental challenges remain. Air and water pollution in China still exceeds applicable standards in most areas. Freshwater withdrawals already exceed sustainable levels of both surface and underground resources, especially in North China. The forest cover remains far below the level needed to restore its environmental and ecological functions, even though a massive reforestation effort has been under way for nearly a decade. Prospects for continued progress in increasing resource efficiency, however, are clouded by the current economic structure, with concentration of industrial growth in resource intensive, high polluting industries.

Table 4 Environmental Indicators

2005 2007 2010 Percent      target completed

COD emission (10000 ton) 1414 1384 1270 21SO2 emission (10000 ton) 2549 2467 2295 32Utilization of industrial solid waste (%) 56 61.2 1/ 60 > 100

Source: Statistical Yearbook 2007, Xinhua. 1/ Data for 2006.

29. In sum, significant progress has been made toward many of the major objectives of the 11th 5YP, but important challenges remain. In particular, insufficient progress on macroeconomic rebalancing and changing the economic and industrial structure has limited progress on energy and water intensity, and environmental quality. Also, with little progress in rebalancing, less urban job creation has occurred than could have been under a more labor intensive pattern of growth—in particular, less formal urban employment and permanent migration—potentially undermining the social progress that has been achieved. Moreover, the limited strengthening of the exchange rate, combined with rapid productivity growth, especially in manufacturing, has contributed to the large and unsustainable external current account surplus and inflation risks. Accordingly, priority should be given to rebalancing which would help to meet the environmental objectives and solidify the social gains.

The Policy Agenda Ahead

30. Achieving a rebalanced economy requires reforms in a broad range of areas.These encompass macroeconomic and structural policies, fiscal policy and intergovernmental fiscal relations, government spending, monitoring and evaluation, administrative reforms, price reforms, and regulations and standards. The implementation experience thus far suggests the following areas for policy adjustments.

31. A range of macroeconomic and structural polices will help to stimulate domestic consumption, reduce domestic saving, and stimulate expansion of the services sector. These include:

Continue to shift government spending from investment to social protection, health, and education.

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Strengthen further the exchange rate to shift production from tradables to non-tradables and increase exchange rate flexibility to give more independence to monetary policy; this, in turn, would facilitate greater reliance on market based instruments, including interest rates, for macroeconomic management.

Further pursue financial market reforms to improve the efficiency in the allocation of capital, consistent with higher interest rates, thus keeping growth up with less investment and increasing the role of consumption. Such reform and more efficient allocation of capital should benefit the service sector and small and medium-sized enterprises.

Expand the dividend policy for SOEs and improve corporate governance to remove the over-investment bias, especially in large, industrial SOEs.

32. Fiscal and tax policy can help to adjust the structure of production:

Eliminate the underpricing of industrial inputs—land, energy, water, natural resources, and the environment—through price increases, tax measures, and/or pollution charges. Accelerated energy price reform would allow prices to reflect the full cost of supply, including environmental and depletion costs. The recent adjustment in domestic oil prices is a step in the right direction.

Remove remaining distortions in the tax system that subsidizes manufacturing, including the VAT system as well as remaining preferential tax treatment of FDI.

Remove remaining restrictions on the development of a thriving services industry. Addressing, as planned, monopolies and oligopolies in several service sectors is important, as is removing other barriers and vigorously implementing WTO commitments.

33. Introduce institutional reforms that give local officials stronger incentives and better tools to pursue rebalancing are also important. A key measure is to increase accountability, especially via the performance evaluation of local officials and enforcement of laws and regulations. Last year’s measure to include land revenue in the local government budget, rather than as part of the extra-budgetary funds managed by land bureaus, could improve the governance of these funds and reduce the incentive to pursue a land-intensive development pattern.

34. China is in a strong fiscal position to support the rebalancing of the economy. Fiscal savings from higher energy and resource prices and environmental taxes could be used for expenditures in priority areas identified by the 11th 5YP, reductions in other taxes, or compensation to vulnerable groups affected by the price adjustments.

35. Reform of the intergovernmental fiscal relations would allow poor regions to have the resources to carry out improvements in the social sectors. Inadequate local

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funding (and capacity) in poor regions is a serious constraint on further progress in many areas, including the delivery of rural services, social protection, education, health, and resource efficiency. Sub-national governments in China are responsible for a much larger share of spending than in most other countries. In the absence of significant net transfers from rich to poor regions or other revenue sources, large disparities in spending per person on public services are unavoidable. Moreover, income-poor but resource-rich provinces are currently not adequately compensated when their resources are extracted for national development. Reform of the intergovernmental fiscal system is required to fundamentally address the problem. Such reform would need to include higher net transfers via the center from rich regions to poor regions, notably through higher equalization grants, possibly combined with further changes in spending responsibilities between sub-national governments and the center. In addition, China should consider options for devolving more revenue sources that benefit poor regions. Higher resource taxes provide an opportunity to grant the poor provinces higher tax shares and make the poor provinces less dependent on fiscal transfers. Payments for environmental services (such as water, land conversion rights) could become revenue for the poor provinces as well.

36. Increased government spending puts a premium on the efficiency of spending. The recent increase in spending and introduction of many new initiatives call for more systematic and rigorous monitoring and evaluation frameworks.This involves more research and analysis to develop better monitoring indicators, focusing on results and quality, drawing on international experience and benchmarks; and developing a robust information system to track progress. More can be done to nurture a culture of evidence-based evaluation and building capacity for it. There needs to be better linkage between results of evaluations and adjustments in policies, priorities, and financing. In addition, stronger accountability is required, and the recent move to expand the local officials’ evaluation system to include objectives of the 11 th 5YP should be helpful in this regard. Fragmentation of various programs, while probably unavoidable in a big country like China, calls for further efforts at consolidation and coordination.

37. To close the rural-urban income gap, a dual approach is needed that fosters both a reallocation of labor from rural to urban areas and increases rural labor productivity on and off the farm. While restrictions on the migration of rural labor to urban areas can be further relaxed, this in itself cannot be done fast enough to effectively close the rural-urban income gap. Nor can urban-rural income transfers fully close the gap. This suggests the need for increases in agricultural output and productivity which, in turn, requires more, but also more efficient public spending on rural public goods. More spending could be directed to agricultural science and technology; environmentally sustainable techniques for staple crop production (including more efficient water management); and agricultural diversification to high value products. Further efforts are also needed to create an enabling environment for agricultural modernization by deepening and speeding up land related reforms, including land acquisition and land tenure rights, and improving agricultural producers’ access to financial services.

38. Administrative tools need to be augmented by increased reliance on market

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incentives and regulatory means. So far, rapid progress has been achieved through administrative measures in the areas of energy efficiency and environmental pollution. However, this rate of progress may be difficult to sustain in the future without greater reliance on market incentives and the regulatory system, including the criteria used for performance evaluation of local government officials. There is increasing urgency in building a policy and institutional framework that uses market-based instruments to encourage rebalancing. Price reforms are called for, especially in the areas of energy and resources pricing and taxation, but China’s grain price policies may also need to be adjusted to bring domestic prices closer to international ones. Regulatory measures could include environmental emission standards, consumer products labeling, and fuel and building efficiency standards. Vigorous enforcement of regulations and standards will, of course, be equally important.

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1. Introduction

Situation and Developments Prior to the Start of the 11th 5YP

1.1 When the 11th 5YP was formulated in 2003-05, China had experienced a long period of sustained, rapid economic growth and development. GDP growth averaged close to 10 percent per year between 1978 and 2005, with growth less volatile over time and inflation low since the mid-1990s. China’s overall growth put it in a league of its own: growth in GDP per capita was significantly higher than the average for low income countries (LICs), middle income countries (MICs) and other BRICS (Figure 1.1). As a result, China was catching up fast with MICs: its GDP per capita had increased from 43 percent from that of the MICs in 1995 to 66 percent in 2005 (in prices of 2000).

1.2 Living standards improved and poverty was reduced substantially. The share of the population in poverty had fallen sharply on all definitions. On cost of basic needs benchmark, poverty had declined from 65 percent in 1981 to around 7 percent in 2005, lifting hundreds of millions out of poverty. Unemployment pressure in urban areas mitigated earlier this decade after the worst of the labor shedding by SOEs came to an end and private sector activity surged.

1.3 Structural reforms and opening up had continued apace and had brought China closer to a fully fledged market economy. China’s economy was integrating swiftly into the world economy via very rapid expansion of external trade and foreign direct investment. Multinational companies set up manufacturing bases in China to supply domestic and international markets.1 The role of the private sector and market mechanisms increased steadily, while direct government control over economic activity diminished.2 Product and factor markets had become more integrated domestically, although there is room for further integration, particularly in services. Financial sector reform continued, but lagged behind the transformation of the real economy, with all major banks still state-owned and bank financing dominating the financial system. Nonetheless, in 2005 the government was recapitalizing the major state banks, invited strategic partners and was preparing to raise funding in capital markets; supervisory and regulatory controls as well as internal management and controls were improved, although there is further room for improvement to reach international best practice. In parallel, capital markets expanded and deepened. Finally, fiscal revenues, which had during the initial stage of the reform period been under pressure, had recovered since the mid-1990s.

Figure 1.1 China’s Growth Performance is in a League of its Own

Figure 1.2 Human development also progressed 1/

1 Ranging between 2 and 4 percent of GDP since the early 1990s, FDI has been important in China not so much as a much-needed source of financing of investment, but as a vehicle to access technology and managerial skills. 2 The OECD reports that in 2003 the private sector share of value added was 52 percent, up from 28 percent in 1998 (OECD, 2005).

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Source: World Development Indicators, WB

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0.10

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1980 1989 1993 1997 2001 2005

Lower income countries

Middle income countries

China

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Source: UNDP, staff estimates.1/ UN Human Development Index excluding GDP per capita.

1.4 Despite – or perhaps as a result of – these achievements, the attention of policy makers focused increasingly on growing economic and social imbalances that emerged as a result of China’s rapid growth. The midterm review of the 10th 5YP carried out by the NDRC identified 5 major imbalances.3 These were an “unhealthy” pattern of economic growth, which relies overly on investment and exports”; insufficient development of the tertiary industry; insufficient policy guidance and incentives for developing the western region; slow progress with urbanization; and an imbalance between economic and social development.

1.5 More specifically, during 2003-2005, the government observed the following imbalances that it wanted to address.

Heavy reliance on investment and exports for economic growth, at the expense of domestic demand, especially consumption. This was reflected in a large and growing external current account surplus that reached 7 percent of GDP in 2005.

Domination of industry, especially heavy industry, over the services sector. Services make up 40 percent of GDP in China, compared with an average 54 percent in middle income countries and 70 percent in high income countries (Table 1.1).

Rapid increases in the demand for energy and other resources. China’s primary energy consumption grew by 62 percent during 2000-05 largely because of its capital-intensive, industry-led growth. China’s energy intensity

3 This mid-term review, China’s first, was carried out by the NDRC’s Strategy Planning Department (SPD). It relied on available indicators and data to measure key economic and social trends, as well as on mid-term reviews that provinces and ministries were asked to produce and a survey among 100 experts and academics. The review looked at the implementation of the 10 th 5YP in 9 areas: “macro-regulatory targets”, industrial structure, development of the western region, urbanization, science, technology and education, the natural environment, reform of the economic system, opening up to the outside world, and people’s lives.

2

0

500

1,000

1,500

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2,500

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3,500

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1980 1984 1988 1992 1996 2000 2004

ChinaLower income countriesMiddle income countriesOther BRICS

GDP per capita 2000 US$

also climbed, reversing a trend decline since the start of market reforms. By 2005, it was 43 percent higher than in India and 73 percent higher than in the U.S., based on PPP GDP. Excessive withdrawal of water from surface and underground resources caused acute water scarcity in the northern plains.

Widening disparities in regional development and incomes, between urban and rural areas and coastal and inland provinces.

Pronounced unevenness in access to basic public services between urban and rural areas. Social protection remained inadequate, especially for vulnerable groups including large numbers of rural-urban migrants. Access to education was uneven between urban and rural areas; the health system was poorly developed in rural areas, and there was a general lack of access to affordable health care.

A mixed record in the improvement of environmental quality. While air quality had improved in many cities, and water quality had improved in the south, overall emissions of key pollutants had increased, as well as the production of solid waste. China is now home to 13 of the world’s 20 most polluted cities. Land use patterns created tensions among the conflicting demands of urbanization, farmers’ income, and environmental protection.

Table 1.1 China in 2005 According to the 11th 5YP Indicators

1995 2000Cagetory Indicator actual actual China MIC 1/ HIC OECD 2/Economic growth

GDP per capita (US$ 3/) 658 949 1,451 2,181 26,051

Value added of service industry (% of GDP) 32.9 39.0 39.9 54.3 69.8Economic Employment of service industry (% of total employment) 24.8 27.5 31.4 70.0structure R&D expenditure (% of GDP) 0.6 1.0 1.3 2.0

Urbanization rate (%) 29.0 36.2 43.0 53.9 76.8Energy consumption per unit of GDP (PPP) 4/ 200.5 100

Population, Water consumption per unit industral value added … …resources, Comprehensive utilization rate of industrial solid wastes (%) 45.9 56.1and Total cultivated land (1 million ha.) 95.0 128.2 122.1environment Total major pollutants emission volume … …

Forest coverage (%) 16.6 16.6 18.2 33.8 33.4Average years of schooling (year) 6.7 7.6 8.5 12.0 16.5

Public Population covered by basic pension in urban areas (100 million) 0.9 1.0 1.7Services Coverage of the new rural cooperative healthcare system (%) 75.7and Newly increased urban employment in five years (10 million) 3.2 2.5 4.4Quality Rural labor force transferred in five years (10 million) … … …of Registered urban unemployment rate (%) 2.9 3.1 4.2 6.4 6.2Life Per capita disposable income of urban households (RMB) 4,283 6,280 10,493

Per capita net income of rural households (RMB) 1,578 2,253 3,255

2005

Sources: WDI, NBS, CEIC, and staff estimates.1/ Middle income countries (average)2/ High income countries, OECD countries (average)3/ Constant 2000 US$4/ High income countries average = 1001.6 In no small part, these imbalances had been an outcome of China’s capital-intensive, industry-led pattern of growth (Figure1.3). China’s growth had been capital intensive, with the investment to GDP ratio rising to almost 43 percent in 2005 and—

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using growth accounting—capital accumulation accounted for over 60 percent of GDP growth during 1993-2005. From a sectoral perspective, China’s growth was driven especially by industry, which during 2003-2005 accounted for over 60 percent of all GDP growth. The burgeoning profits of industrial firms, together with cheap credits from state banks, were invested in additional capacity. Industrial growth was associated particularly with increases in labor productivity, less so with employment growth, reflecting in part labor shedding by SOEs. Moreover, with industry taking the lead, service sector development lagged (the share of services in GDP was 40 percent in 2005, compared to an average of 54 percent in middle income countries and 70 percent in high income countries). As a result, urban employment growth, while robust, was not as high as it could have been, given China’s rapid overall growth.

Figure 1.3 China’s Capital-Intensive, Industry-led Economy in International Perspective 1/

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Share of industry in value added (percent)

Investment over GDP ratio (percent)

Thailand

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Malaysia (1990)

Malaysia

Japan

Japan (1990)

Malaysia (1960)

India (2005)

China (2005)

Sources: World Development Indicators, NBS (for China), and staff estimates.1/ 2001, unless otherwise indicated.

South Korea (1990)

1.7 The capital intensive, industry-led growth pattern has served China well in many respects. The high saving and investment, combined with respectable rates of technological progress, have supported the rapid GDP growth on a sustainable basis by ensuring that potential GDP (the capacity to produce) has broadly grown alongside actual GDP. The massive expansion of industrial production has made China a manufacturing powerhouse.1.8 However, the capital-intensive, industry-led pattern of growth was also a key driver of the imbalances outlined above.

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First, the capital-intensive, industry-led growth had been particularly intensive in energy, natural resources, and environmental degradation, thus accentuating the associated imbalances noted above.

Second, the capital-intensive growth has created fewer urban jobs than a more labor intensive service-based pattern would, and has thereby increased urban-rural inequality. Industry creates fewer jobs than services: in 1993-2005, when industrial value added growth averaged over 11 percent per year, industrial employment rose by 1.6 percent per year. As a result, absorption of agricultural surplus labor was largely left to the service sector, and has been moderate since the mid 1990s. This limited the movement of people out of agriculture and the rural areas, where productivity and income are much lower. The resulting divergence in productivity between agriculture and the other parts of the economy is a key to understanding the increase in rural-urban income inequality and has accentuated rural poverty.

Third, under this pattern, production has tended to outstrip domestic demand. While the pattern of growth was investment heavy, industry-led, and business friendly, surplus labor in agriculture helped to keep wage growth below productivity gains. In terms of the distribution of income, the flipside of the increase in enterprise income and buoyant tax revenues is that wage income, and household income in general, has lagged overall income considerably (the share of wages in GDP declined by 11.5 percentage points between 1998 and 2005). The declining role of wages and household income is the key driver behind the declining share of consumption in GDP since the late 1990s. From the external perspective, a significant share of demand for China’s products has come from abroad instead of from Chinese households and businesses. This has resulted in very large current account surpluses (around 12 percent of China’s GDP in 2007 and approaching 1 percent of global output).

1.9 Government policies helped accentuate China’s capital-intensive, industry- and export-led growth pattern. Starting with a large amount of surplus labor, China’s successful industrialization would by itself have guided the pattern of growth in the direction described above. However, China’s policies have clearly accentuated this pattern. Thus, while serving the economy well in several regards, policies indirectly accentuated the imbalances noted above. The government has subsidized and favored industry and investment over the services sector and domestic consumption in several ways: (i) policies have encouraged saving and investment, with government spending especially geared to investment in physical infrastructure instead of current spending on health and education; (ii) investment in industry has been encouraged in other ways as well, including via easy access to credit for large, industrial firms and a policy not to require profitable SOEs to pay dividends to the state; (iii) industrialization has also been promoted by underpricing key inputs, including energy, land, and the environment; (iv) the reluctance to move to greater exchange rate flexibility and allow the exchange rate to appreciate further stimulated exports and industry; (v) prioritization of industry has also

5

meant that the service sector lagged; and (vi) the containment of migration into urban areas has further shaped the capital intensive nature of growth, even though the containment of urbanization helped avoiding urban slums.

The 11th 5YP

1.10 The 11th 5YP (2006-10) is a major shift from previous plans in terms of the objectives of economic policy.4 Through the 1990s the 5YPs had overall economic growth and development as their dominant objective and emphasized industry and agriculture. Reflecting concerns about the “imbalances,” the 11th 5YP saw a broadening of the set of economic and social policy objectives. The 5YP gives priority to rebalancing the economic structure as well as to environmental and social objectives. The guiding principles and policy orientation seek to rebalance China’s growth pattern, with domestic demand, especially consumption, as the main driver, and services as the leading sector. This, in turn, is expected to better balance economic growth with resource conservation, energy efficiency, and environmental protection. Moreover, rebalancing the pattern of growth is expected to help mitigate the urban-rural divide, and promote more balanced regional development, while improving basic public services, especially social protection, health, and education.5

1.11 China’s 5YPs provide broad direction to policymakers. They do not include many concrete policies. The 11th 5YP has an elaborate structure, with 6 guiding principles, 6 overall orientations, 9 major objectives, and 15 main tasks and strategic priorities. Annex 1 contains an overview of the 11th 5YP. Table 1.2 shows this overview in table format.

1.12 The 11th 5YP identifies six guiding principles: maintain steady and rapid economic development, speed up the transformation of the economic growth pattern; improve the capability for independent innovation; promote coordinated development between urban and rural regions; build harmonious society, and deepen reform and opening up to the outside world (see Table 1.2 and Annex 1 for more detail).

1.13 In accordance with these guiding principles, the 11th 5YP lays down six policy orientations: expand domestic demand, optimize industrial structure, save resources and protect environment, enhance the capability of independent innovation, deepen reform and opening up, and be people-centered (see Table 1.2 and Annex 1 for more detail).

4 A change in name from Plan to Program reflects recognition of the different role the government is supposed to play in an increasingly market-oriented economy. See Chapter 3. 5 The concept of “scientific development” was first proposed at the 3rd Plenary Session of the 16th Party Central Committee of the Communist Party of China in October 2003. It calls for “people-centered development that is comprehensive, coordinated, and sustainable, for the promotion of overall harmonious development of the economy, society, and human beings.” The Session proposed guidelines for building a Xiao Kang Society—and all round well-off society, by achieving 5 balances.

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Table 1. 2 China’s 11th Five Year Plan

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Guiding principles Policy orientations Objectives Main tasks and strategic priorities

1. Building up new socialist country side (p 9): develop modern agriculture (higher productivity, agricultural structural adjustment, enhance agricultural service system, improve markets), increase peasants’ income (agricultural income, non-agricultural income, fiscal impact), improve rural conditions (infrastructure, rural environmental protection, rural health service, rural social security), train new type peasants (education, skill training, culture), increase agricultural and rural investment, deepen rural reform;

1. Stable operation of macro economy, 2. Optimization of industrial structure (p 16) (here, seems to be filled in as “how to improve competitiveness and upgrade”):with robust growth of GDP and urban employment, accelerate development high-tech industry (electronic, information, and manufacturing industries; bio industry; air space industry);and moderate inflation and basically balanced trade; equipment manufacturing industry (major technical equipment, automobile, shipbuilding);

optimize energy industry, with conservation, with coal as basis, build stable, economic, 2. Optimization and upgrading of industrial structure, clean and safe energy (coal, electric power, petroleum and gas, renewables); rationalize structure of industry and enterprise organization, adjust raw material industrial structure and distribution (optimize metal industry, adjust distribution chemical industry); increase share of the service sector, increase spending on R&D, light and textile industry; informatization;

1. Maintain steady and rapid economic development 1. Expand domestic demand, develop a group of “superior” companies with IPRs, well know relying more on domestic demand and consumption, especially consumer demand, change composition brands and strong international competitiveness; 3. Development of service sector : and less on investment, keeping macro balance; of demand from relying mainly on investment and exports producer-oriented service industry (transport, modern material ciculation industry, finance, information services, commercial services);

to more balance; 3. Significant increase of resource utilization efficiency, enrich consumption service industry (commercial and trade, real estate, tourism, town public utility, community service, sports); reduce energy and water intensity, increase water available for policy guidance (p 29): break monopolies and entry barriers, separate profit oriented organizations from non-profit ones,

2. Speed up the transformation of economic growth pattern 2. Optimize industrial structure, irrigation, and {use comprehensively} industrial solid waste; large cities should favor services industry;to a more rebalanced and sustainable one, shift drivers from industry and quantities to the 3 sectors using fewer resources and protecting the environment; (including agriculture and services) and structural upgrading; 4. Coordinated urban and rural development, 4. Coordinated regional development (including urbanization) (p 30):

building the new socialist country side, increase urbanization, overall regional development strategy (western development, old industrial bases (NE), central, east takes lead , old revolutionary bases, minority areas)prevent increase in urban-rural inequality in incomes, living standards, principle function area (optimized development zone, key development zone, restricted development zone, classified management regional policy);

3. Improve the capability for independent innovation 3. Save resources and protect environment: and public services; sound urbanization (guide population urbanization by classes, rational urbanization spatial layout, urban planning);using science and education; based on a change in the pattern of growth, move sources

of growth from “resource investment” to efficiency increase; 5. Improved basic public services, 5. Building resources-saving and environment-friendly society (p38): ensuring 9 years education, have a sound public health recycle economy (conserve energy, save water, save land use, save materials, strengthen comprehensive resource utilization); and medical services system, increase social security strengthen policy measures to promote conservation (standards, specification, power demand side management,

4. Promote coordinated developm b/t urban and rural regions: 4. Enhance the capability of independent innovation: coverage, including old-age insurance and the rural cooperative medical implement finance and taxation, price and investment policies conducive to resource conservation, replace petroleum); solving “3 rural issues” (agriculture, farmers, and the country side), shift drivers of growth from “fund and physical investment” system, decrease poverty; protect and remedy natural ecology {from treatment to prevention}; promote new socialist countryside and sound urbanization; to science, technological progress, and human capital; strengthen environmental protection (water pollution prevention, emission, solid waste, environment protection);

6. Enhanced sustainable development, strengthen resource management (water, land, mineral); ocean and climatic resources;contain population, keep up farmland retention, safeguard water,

5. Build harmonious society: 5. Deepen reform and opening up: increase energy and mineral resources, stop ecological/environmental 6. Strategies of science, education and talents to revitalize the nation (p 46): being people-centered, resolve practical issues affecting people, move away from administrative intervention towards deterioration, reduce emission major pollutants, increase forest coverage, scientific and technological innovation (independent innovation, techn. innovation, increase protection IPR, reform scientific and techn. system);coordinate development economy and society, promote social equity market driven development with macro control and adjustment and control greenhouse gas emission; education development (compulsory education, vocational education, higher education, increase educational investment, reform management); and shared growth, promote democratic and legal system by the state; human resource development (high quality talent team, innovate talent work mechanism)construction, maintain social stability; 7. Enhanced market economy,

6. Be people-centered: reforming administrative management, SOEs, finance and taxation, 7. Deepen reform and opening up (p 52): 6. Deepen reform and opening up to the outside world: emphasise improving people’s living standards, shift emphasis banking, science and technology, education, culture and health, administration system (change government functions, improve government decision making, reform investment system);reform towards socialist market economy, reform enterprise from increasing material wealth to promoting comprehensive coordinate opening up to the outside world and domestic development, improve basic economic system (SOE reform, SOE asset supervision, reform monopoly industries); and property right systems, prices determined by markets human development and coordinated development of economy and open up further; reform fiscal and taxation system; and resource scarcity, increase resource allocation efficiency, and society. reform monetary system (reform financial enterprises, direct financing, improve financial regulation and control, financial supervision); change government functions and improve macro control, 8. Improved living standards, improve modern market system (national market, price formation of resources and utilities, standardize market order); continue opening up to the outside world. increasing per capital disposable incomes and the quality of life, win-win opening (optimize export structure, actively enlarge imports, develop service trade, improve fair trade policy);

and improving conditions in housing, traffic, education, culture, improve quality of FDI ; go-out; international regional economic cooperation; health, and the environment;

8. Promote socialist harmonious society (p 61): 9. Progress with democratic legality population work (birth control, structure births, respond to population aging, women and children’s rights, handicapped); and spiritual civilization building, improve living standards (expand employment, strengthen income distribution, improve social security system, relieve poverty, expand consumption);progress with legal reform, ideology and morality, improve people’s health (public health and medical service system, disease prevention and treatment, Chinese medicine, deepen health care reform); and the harmonious society. public safety (disaster, work safety, food safety, national safety and social stability);

social management (grass roots organizations, ngo’s, deal with contradictions among people);

9. Strengthen socialist democratic and political construction (p 69) :

10. Strengthen the building of socialist culture (p 70): strengthen socialist cultural construction (ideological and ethical progress, enrich people’s cultural life, reform cultural system)

11. Strengthen national defense and army building (p 72)

12. Establish and complete planning and independent mechanism (p 74): implementation mechanisms for guidance different areas; adjust and improve economic policy making; improve planning and management system.

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1.14 The 5YP also describes nine major objectives: stable operation of the macro economy, optimization and upgrading of industrial structure, significant increase of resource utilization efficiency, coordinated urban and rural development, improved basic public services, enhanced sustainable development, enhanced market economy, improved living standards, progress with democratic legality and spiritual civilization building (see Table 1.2 and Annex 1 for more detail).

1.15 To meet the objectives, the 11th 5YP has around 15 main tasks and strategic priorities: 6 build up new socialist country side; optimize industrial structure; develop service sector; coordinate regional development; build resources-saving and environment-friendly society; pursue strategies of science, education and talents to revitalize the nation; deepen reform and opening; promote socialist harmonious society; strengthen socialist democratic and political construction; strengthen national defense and army building; establish and complete planning and independent mechanism. These are not yet concrete, specific policies, but rather areas of emphasis.

1.16 The objectives are supported by 22 quantitative benchmarks (Table 1.2) of the Plan; see below Table 1.3). The benchmarks were classified into benchmarks on “economic growth”, “population, resources, and environment,” and “people’s life and public services.” 8 of the benchmarks are considered obligatory benchmarks that lay down the tasks for the government and are meant to be its responsibility. They can be considered targets for public policy in a market economy. The government is supposed to ensure their realization “through rational distribution of public resources and effective exertion of administration forces.” The other 14 benchmarks are anticipative benchmarks. The government should create favorable macroeconomic, institutional and market environment; target with its policies; and make efforts to realize them. But, in line with their nature in China’s increasingly market driven economy, the government cannot ensure the anticipative benchmarks are realized and can thus not be held responsible for their realization.

1.17 The 22 benchmarks are a good reflection of the areas of major objectives. They clearly show the widening of the set of economic policy objectives towards rebalancing of the pattern of growth, resource efficiency, balanced rural-urban development, sustainability, and living standards.

1.18 Also, a monitoring and evaluation framework was developed, with 3 tiers of quantitative benchmarks, although this does not seem to be operational yet (see Annex 2).

1.19 This evaluation report aims to assess the overall progress with implementation of the Plan. The assessment is organized broadly according to the main objectives of the plan, with chapters on “stable operation of macro economy”; “optimization and upgrading of industrial structure”; “significant increase of resource utilization efficiency”; “coordinated urban and rural development”; “improved basic public services”; and “enhanced sustainable development.” The objective of “improved living standards” has been merged with that of the macro economic chapter. Some evaluations

6 The World Bank has not been asked by NDRC to evaluate the tasks in italics.

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are done in more depth than others. The evaluations have been more detailed in the areas where the objectives and emphasis of the 11th 5YP differs from previous ones and that have received particular emphasis of policy makers. This is the case for increasing resource efficiency, improving basic public services, enhancing sustainable development, and coordinating urban and rural development. The objective of “enhanced market economy” has not been evaluated, since the objectives of the 11th 5YP do not materially differ from previous ones in this area.

Table 1.3 China's Progress in Meeting the Quantitative Indicators under the 11th 5YP

2005 2010Cagetory Indicator actual actual 2000-2005 1/ 2005-2010 2/

GDP (Trillion RMB) 18.4 26.1 8.5 7.7GDP per capita (RMB) 14,103 19,270 6,245 5,167Value added of service industry (% of GDP) 39.9 43.3 0.9 3.4Employment of service industry (% of total employment) 31.4 35.3 3.9 3.9R&D expenditure (% of GDP) 1.3 2.0 0.3 0.7Urbanization rate (%) 43.0 47.0 6.8 4.0Population (100 million) 13.1 13.6 0.4 0.5

Reduction of energy consumption per unit GDP (%) … … … 20Reduction of water consumption per unit industrial VA (%) … … … 30Efficient utilization of agricultural irrigation water (%) 0.5 0.5 … 0.5Comprehensive utilization rate of industrial solid wastes (%) 56.1 60.0 … 3.9Total cultivated land (1 million ha.) 122.1 120 -6.2 -2.1Reduction of total major pollutants emission volume (%) … … … >10Forest coverage (%) 18.2 20.0 1.7 1.8

Average years of schooling (year) 8.5 9.0 0.9 0.5Population covered by basic pension in urban areas (100 million) 1.7 2.2 0.7 0.5Coverage of the new rural cooperative healthcare system (%) 75.7 80.0 75.7 4.3Newly increased urban employment in five years (10 million) … … 4.4 4.5Rural labor force transferred in five years (10 million) … … … …Registered urban unemployment rate (%) 4.2 5.0 1.1 0.8Per capita disposable income of urban households (RMB) 10,493 13,390 4,213 2,897Per capita net income of rural households (RMB) 3,255 4,150 1,002 895

Sources: WDI, NBS, CEIC, and staff estimates.1/ the real change in 2000-20052/ the targeted change in 2005-2010

Change

Public services and quality of life

Population, resources, and environment

Economic structure

Economic growth

1.20 The evaluations are done by World Bank staff members in their area of expertise, helped and guided by local and international consultants. The evaluations are based on a variety of types of information. These include reviews of available data and policies; analysis of background studies; and interviews with government officials, academics, and others.

1.21 The evaluations broadly follow a common approach. They start with describing the situation before the 11th 5YP; describe the relevant key objectives in the FYP; evaluate of developments so far, in terms of quantitative objectives and indicators and policies and reforms; and draw conclusions about progress so far, challenges and problems, and possible policy adjustments to meet the overall objectives. The evaluation focuses on the implementation of the 5YP, instead of its design. Nevertheless, some evaluations generated some suggestions policymakers could consider in the preparation of subsequent 5YPs.

2. Stable Operation of the Macro Economy and Improve Living Standards

2.1 This chapter evaluates progress in achieving 2 objectives: (i) “stable operation of the macro economy”; and part of the objective (ii) “improved living standards.”

2.2 Stable operation of the macro economy has long been a key economic objective and China performed for a long time since the mid-1990s quite well on this front. The 11th 5YP characterizes “stable operation of the macro economy” as sustained rapid GDP growth and urban employment growth, moderate inflation, and “basically balanced trade”.

2.3 The objective of “improved living standards” is in part related to the macroeconomic objective. The 11th 5YP characterizes “improved living standards” as reflected in rising per capita disposable incomes, as well as in improved conditions in quality of life concerns such as housing, traffic, education, culture, health, and the environment. Most of these dimensions are covered in the evaluation of other objectives, particularly “coordinating urban and rural development”, “improving basic public services”, and “enhancing sustainable development”. This chapter will focus on “rising per capita disposable incomes.”

Situation and Developments pre 11th 5YP

2.4 During the 10th 5YP period (2001-05), growth of activity and employment had been impressive. GDP growth averaged 9.6 percent per year (Table 2.1). Urban employment growth was respectable at an average of 3.4 percent during 2001-05. Nonetheless, this is not as fast as it had been in other East Asian countries when they were at a similar stage of development. This is in part because China’s urban labor market was still affected by SOE reform and labor shedding, even though the impact was not as high as in the 1990s. As in other developing countries, informal urban employment, which expanded significantly, may not be fully measured. However, as suggested in Chapter 1, the limited urban employment growth has also been because of China’s particular investment heavy, industry-led pattern of growth. The official urban unemployment rate was 4.2 in 2005.

Table 2.1 Macroeconomic Developments (2000-2005)

  2000 2001 2002 2003 2004 2005Real GDP (production side) 8.4 8.3 9.1 10.0 10.1 10.4Consumer prices (period average) 0.4 0.7 -0.8 1.2 3.9 1.8Fiscal balance (% of GDP) -3.6 -3.1 -2.6 -2.2 -1.3 -1.2Current account balance (% of GDP) 1.7 1.3 2.4 2.8 3.6 7.1

Sources: NBS, SAFE, and Ministry of Finance

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2.5 Rapid growth was accompanied by generally low inflation. At the beginning of the 10th 5YP, China had very low or even negative inflation. This was attributable mainly to very low international commodity prices, including oil, and the impact of trade liberalization because of China’s WTO accession in 2001. More broadly, inflation in China has been low since the mid-1990s because potential GDP (the capacity to produce) has grown very rapidly along with actual GDP (demand). This impressive pace of potential growth was possible due to high investment and rapid productivity increases. Consumer price inflation spiked temporarily in 2004 because of a surge in food prices, but inflation returned quickly to low levels thereafter.

2.6 However, external imbalances were building up. While import growth was rapid, it was outpaced by even stronger export growth. As a result, the external current account, which had been in small surplus since the early 1990s, rose sharply and reached over 7 percent of GDP in 2005. As discussed in Chapter 1, the external imbalance emerged in large part because of China’s particular pattern of growth, with an increasing part of the demand for China’s products coming from abroad instead of domestically.

2.7 Per capita incomes rose on average 8.9 percent per year during 2001-05, raising living standards rapidly, also compared to other countries. However, again in part because of China’s pattern of growth (See Chapter 1), household incomes lagged behind overall economic growth and rural incomes lagged urban ones, with average real growth of 6.2 percent in rural areas in this period versus 11.3 percent in urban areas.

2.8 Thus, overall, a favorable overall macroeconomic performance during this time coincided with some emerging imbalances linked to China’s pattern of growth.7

Key Objectives in the 11th 5YP on “Stable Macro Economy”

2.9 The 11th 5YP set the following key objectives:

Annual average GDP growth of 7.5 percent Transfer of 45 million “rural labor forces” and an urban unemployment rate of

below 5 percent Prices “basically stable” International trade “basically balanced”

Key Initiatives and Developments

2.10 While some incremental policy changes were made, the broad orientation of macroeconomic policies continued. Changes include: (i) some more flexibility in the exchange rate regime — the RMB strengthened against the US dollar and, especially in the second half of 2008, also in (trade weighted) effective terms; (ii) some greater use of interest rates as a macroeconomic policy tool; (iii) increased use of price controls and

7 For a useful overview of China’s economic data, and comparison with peer countries, please see the World Bank’s “at a glance data” in http://devdata.worldbank.org/AAG/chn_aag.pdf

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related administrative measures during an episode with rising inflation; (iv) a more active role of fiscal policy in macroeconomic management, reflected in a reprioritization of fiscal spending and a planned expansion of fiscal policy in 2009.

(i) Growth

2.11 Overall GDP growth was very strong, at almost 12 percent in 2006 and 2007, much higher than envisaged and also higher than potential output growth (Figure 2.1). Economic growth is likely to be affected considerably by the global slowdown that is taking shape. However, China’s domestic economy continues to have solid momentum. As a result, China should have little problem meeting the 11 th 5YP’s objectives on GDP and GDP per capita growth (Figure 2.2).

2.12 However, there has been little decisive progress with rebalancing. The pattern of growth remained unchanged during 2006-07 and in the first half of 2008 because the underlying drivers, including the policies accentuating it, had not changed materially. Growth continued along familiar lines, powered by industry and, on the expenditure side, exports and investment.8 Industrial production decelerated sharply in end-2008, but this is a cyclical phenomenon, caused by the global financial and economic turmoil rather than the result of rebalancing.

Figure 2.1 Potential Growth Broadly Keeps Pace with Actual Growth

Source: NBS, staff estimates1/ Estimated using a growth accounting framework with Cobb Douglas production function.

Figure 2.2 Overall Growth Target Seems in Easy Reach

Source: NBS, staff calculation

Source: NBS, staff estimates

(ii) Employment

2.13 Urban employment growth is contained by the overall pattern of growth continuing along traditional lines, because the relatively labor intensive service sector continues to lag the industrial sector. However, in 2006 and 2007 economic growth was so fast that urbanization and urban employment creation continued apace. 20.2 million

8 Several times in recent years concerns have been expressed about overcapacity. However, as argued in Box 2 of our May 2006 China Quarterly Update, it is not obvious that there was substantial overcapacity.

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4

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1993 1995 1997 1999 2001 2003 2005 2007

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1990 1994 1998 2002 2006 20100

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GDP (trn RMB)

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new (urban) jobs were created in 2006 and 2007 and an estimated 25.3 million workers moved to urban areas. The urban unemployment rate stood at 4 percent in 2007, lower than the target set in the 11th 5YP. Unemployment pressure is set to increase as the impact of the international downturn intensifies.

(iii) Inflation

2.14 Sharp increases in food prices pushed up overall inflation to a peak of 8.7 percent in February 2008 (Table 2.2). During this period, underlying inflation pressures have remained modest and core inflation has remained modest. With food price pressures subsiding, headline inflation came down since May 2008 even as additional pressure remained from higher prices of energy and raw materials. Looking ahead, with energy and raw material prices sharply lower, inflation is likely to continue to decline and it may be very low in 2009. Throughout the recent inflation episode China’s real economy has shown to be flexible enough to absorb exogenous price shocks. However, risks and uncertainties about future price developments are accentuated by the conduct of monetary and exchange rate policy, with monetary policy constrained by the limited flexibility in the exchange rate.

Table 2.2 Main Macroeconomic Indicators

  2005 2006 2007 2008 WB 1/Real GDP (production side) 10.4 11.6 11.9 9.4Consumer prices (period average) 1.8 1.5 4.8 6.5Fiscal balance (% GDP) -1.2 -0.5 0.7 -0.4Current account balance (% GDP) 7.1 9.5 11.3 9.3Source: NBS, SAFE, Ministry of Finance.1/ World Bank estimation.

2.15 Since early 2007, overall inflation picked up as a result of sharply rising international and domestic food prices (Figure 2.3). For a few years now, sharp increases in global industrial commodity prices had driven up China’s raw material prices, but the impact on consumer prices had been modest. Oil prices also soared, internationally, but this was only partly reflected in China’s prices because of price controls. However, food prices affected households and the CPI more significantly (they have a weight of around 1/3) and more directly. Pork prices soared during 2007, in part because of a disease that discouraged farmers from growing pigs. In addition, prices of internationally traded food products such as grain and edible oils rose sharply, in part because of higher energy prices and diversion of grain production for use as bio-fuel. The impact of international prices on China’s food prices has become increasingly important, particularly since the opening up of China’s markets upon WTO entry.

2.16 Headline consumer price inflation has been receding throughout 2008. The impact of earlier increases in prices of food, energy, and raw materials started to fade from the (yoy) inflation data. During this inflation episode, spill-over of higher headline inflation into wages and “core” consumer prices (CPI excluding food and energy) has remained modest.

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2.17 The modest extent of spill over in part also reflects policy responses. Monetary conditions were tightened in order to contain inflationary expectations. Interest rates were raised somewhat and administrative measures including credit quotas were used to contain monetary aggregates. The exchange rate was also made somewhat more flexible. The pace of appreciation against the US dollar accelerated in the first part of 2008; while appreciation vis-à-vis the US dollar halted later in 2008, US dollar strength meant that the effective exchange rate appreciated considerably in 2008. In addition, during the height of the inflation episode, price freezes on specific items were introduced. (see below).

(iv) International Trade

2.18 The objective of basically balanced trade has clearly not been achieved during the first half of the 11th 5YP. In 2006 and 2007, export growth continued to soar, outpacing import growth. As a result, China’s current account surplus surged to around 11 percent of GDP and is approaching 0.75 percent of global GDP. In 2008, the external surplus increased further in absolute terms, despite a slowdown in the world economy. This not only contributes to imbalances in the pattern of demand in China, but also causes frictions internationally. Prospects are for a plateauing of the surplus (at 9-10 percent of GDP) but a material decline is not in sight.

2.19 As explained in Chapter 1, these large external imbalances are in large part a result of China’s particular overall pattern of growth. Chapter 1 discussed the policies that accentuated this pattern. China’s exchange rate policy is one of these key policy factors, in particular the limited flexibility of the exchange rate and the reluctance to have the exchange rate appreciate in line with fundamentals. Given China’s stage of development, the beneficial impact of more rapid introduction of exchange rate flexibility for monetary policy—granting it independence—probably outweigh the potential detrimental impact of more exchange rate flexibility on the real economy. Also, given the

Figure 2.3 The Rise and Fall of Food Price Driven Inflation

-5

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2001 2002 2003 2004 2005 2006 2007 2008

Change (percent

yoy) Headline CP I inflationFood pricesNon-food prices

Source: NBS, staff estimates. 1/ International prices weighted using weights in China’s food imports.

Figure 2.4 Although a Price-Wage Spiral is is Unlikely, Wage Growth has Remained Robust

-10

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Source: NBS, staff estimates.

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strong underlying competitiveness position of China’s manufacturing sector and the need to rebalance the pattern of growth, a stronger effective exchange rate seems appropriate.

2.20 China’s massive current account surplus complicates monetary management. The current account surplus, together with capital inflows generate large overall balance of payments surpluses which require constant sterilization in the form of central bank bills issuance and reserve rate hikes. While earlier in 2008 a lot of attention was focused on the capital inflows—speculative inflows in particular—these inflows are in large part also a function of the current account surplus because the latter creates the expectation that the currency can only appreciate in the future, inducing more capital inflows.

2.21 Per capita incomes rose rapidly in 2006 and 2007 in both urban and rural areas (Table 2.3). Rural incomes have continued to lag urban ones. This is almost unavoidable, given China’s capital-intensive, industry-led growth pattern (Chapter 1). Nonetheless, rural incomes have grown impressively, raising living standards (Chapter 5).

How Have Macro Policies Evolved during the 11th 5YP?

2.22 The limited degree of exchange rate flexibility has constrained interest rates from rising sufficiently in response to domestic considerations. As CPI inflation rose to over 8 percent earlier in 2008, deposit and lending rates were increased only modestly, resulting in significantly negative real interest rates that seemed inappropriate with regard to the macroeconomic situation and adds to risks in the financial sector. Monetary conditions were still tightened, largely via credit controls. But it was risky and distortive to have such low real interest rates. A key reason why interest rates were so low is that, under the existing exchange rate regime, and with the balance of payment surpluses, the authorities were reluctant to raise domestic interest rates, for fear of attracting capital inflows. The low interest rates boosted the demand for credit and have at times contributed to increases in prices of stocks and houses, although China’s overall increases in housing prices are low in international comparison.

Table 2.3 Per Capita Household Incomes (growth, in percent)

    2003 2004 2005 2006 2007

UrbanNominal 10.8 11.8 11.8 12.4 17.2Real 9.7 8.2 10.0 10.7 12.2

RuralNominal 3.9 12.8 14.6 8.5 15.2

  Real 2.2 7.6 12.2 6.9 9.3Source: National Bureau of Statistics.

2.23 The exchange rate regime has gradually evolved and the exchange rate has gradually appreciated. Since July 2005, the exchange rate is officially set with reference to a basket of currencies instead of being pegged against the US dollar. Since then, in the face of the large and growing external surplus, the RMB has appreciated almost 21 percent against the dollar up to November 2008. On a trade weighted basis, the

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appreciation has been more limited. According to the IMF, the nominal effective exchange rate appreciated 15 percent between July 20, 2005 and mid November 2008. While exchange rate flexibility also increased somewhat, it is still modest compared to what is needed to discourage the kind of “one way bets” that encouraged financial capital inflows (called “hot money” in China) in the first half of 2008.

2.24 In line with the government’s strategic direction, the use of interest rates to affect monetary conditions has increased somewhat, but it has remained limited. Greater reliance on the interest rate instrument has been prevented by the lack of exchange rate flexibility at a time when domestic considerations called for different interest rates in China than in the US. Specifically, in order to contain inflation, the government since 2007 has aimed at tightening monetary policy. However, with the interest rate differential between China and the US having turned positive after the recent US Federal Reserve cuts, the authorities were concerned that higher interest rates would attract more capital inflows (although it is not clear how high interest sensitive capital inflows are). This external constraint kept domestic interest rates lower than they otherwise would be. Interest rates were increased during 2007, but these increases lagged far behind the rise in inflation. As a result, administrative measures and window guidance were used to affect bank lending. The tightening of window guidance at the end of 2007 appears to have been relatively successful in reducing credit expansion, although the success of such measures is difficult to maintain for long periods without economic costs. Using administrative instruments instead of interest rates adds risks and distortions to the financial sector, and it would be best to reduce reliance on them over time.

2.25 The government in 2007 introduced several administrative and fiscal (taxation and subsidy) measures to dampen price rises, keep items affordable, and contain inflationary expectations. Administrative measures may serve a useful purpose in the short run. However, in the medium term, the detrimental incentive effects that they generate are likely to outweigh the benefits. That is why the government announced its intention not to rely on them for too long and, after inflation had fallen considerably the government announced in November 2008 that the price controls would be removed.

2.26 In 2005, fiscal policy moved from “proactive” to “prudent”, but in end 2008 it was shifted back to proactive because of the pronounced global slowdown. Indeed, China is in a strong macroeconomic position to stimulate demand. Fiscal policy measures are particularly well suited to support growth, because they can, if well-designed, also contribute to the much-needed rebalancing of the economy. Easing fiscal policy can be done via higher spending, especially the priority areas covered in other chapters including programs to increase energy efficiency or in the social sectors, or tax cuts. In the meantime, while fiscal transfers to poor regions have increased, the fundamental inter governmental fiscal system has not undergone significant change.

2.27 The underlying drivers of growth did not change materially. There has been some tentative adjustment of structural policies underlying the pattern of growth, including fiscal policy, the pricing of land, enforcing environmental legislation. But, these adjustments have been small, and given the momentum that China’s industrial sector,

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they seem not to have been large enough to “tilt the balance”.

Emerging Issues and Assessment

2.28 While China is challenged by an economic slowdown that is set to intensify, China has so far succeeded in combining rapid economic growth with broadly stable macroeconomic conditions. Macroeconomic stability in China benefits from solid macroeconomic fundamentals, including a sound fiscal position, while growth is also benefitting from progress with reform, opening up, and moving to a market economy.

2.29 However, the overall pattern of growth remains largely unchanged, contributing to the persistence of external imbalances and complicating the achievement of several other objectives of the 11th 5YP, notably increasing energy efficiency. The challenge ahead is to rebalance the pattern of growth without sacrificing growth unnecessarily. Broadly, 5 types of policies would help rebalancing. In several of these areas, policy plans and/or proposals are in the pipeline although that does not mean that they will be introduced soon.

2.30 First, several macroeconomic and structural measures will help to stimulate domestic consumption and stimulate the services sector:

Continue to shift government spending from investment to health, education, and social safety. Chapter 6 described many recent initiatives in this direction, which is encouraging in this regard;

Appreciate further the exchange rate to shift production from tradables to non-tradables and increase exchange rate flexibility to give more independence to monetary policy;

Further strengthen financial market opening and reform, to improve the efficiency of the allocation of capital—thus keeping growth up with less investment—and increase the role of consumption;

Expand the dividend policy for State Owned Enterprises (SOEs) that has been introduced on a moderate scale and improve corporate governance, to remove the over-investment bias, especially in large, industrial SOEs;

2.31 Second, several price and tax measures would help rebalancing by readjusting the relative attractiveness of manufacturing production (tradables) over producing services (non tradables):

Eliminate the underpricing of industrial inputs—land, energy, water, utilities, natural resources, and the environment through price increases, tax measures, and/or pollution charges. Accelerated energy price reform would allow prices to reflect the full costs of supply, including environmental and depletion costs. The recent adjustment in fuel product prices is a step in the right direction.

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Further remove distortions in the tax system that subsidize and stimulate manufacturing, including from the VAT system and remaining preferential tax treatment of FDI.

Remove remaining restrictions on the development of a thriving services industry. Addressing, as planned, monopolies and oligopolies in several service sectors would be important, as is removing other barriers including by vigorously implementing WTO agreements.

2.32 Third, further relaxing restrictions on the movement of labor and land transaction would facilitate rural-urban migration and mitigate rural poverty. Relatedly, building on the recent initiatives described in Chapter 6, the fiscal system could be improved to provide host cities with more incentives to deliver social services to incoming migrants.

2.33 Fourth, institutional reforms can be introduced to give local decision makers stronger incentives and better tools to pursue rebalancing. A key is to strengthen accountability, especially via the performance evaluation of local officials and enforcement of laws and regulations. Last year’s measure to include land revenues in the local government budget, rather than as part of the extra-budgetary funds managed by land bureaus, could improve the governance of these funds and reduce the incentive to pursue a land-intensive development pattern.

2.34 There is room for more active use of fiscal policy. The rebalancing of the economy and harmonious society that the government aims for relies considerably on fiscal policy measures. With fiscal revenues increasing rapidly, calls have intensified for a more ambitious government and more active fiscal policy in this regard. As discussed in Chapter 6, the government is starting to move in this direction. Meanwhile, with the world economy going through a tough and uncertain time, many in and outside China look at the government to consider supporting growth with fiscal policy.

2.35 Reform of the intergovernmental fiscal relations would allow poor regions to have the resources to carry out improvements in the social sectors. Inadequate local funding (and capacity) in poor regions is a serious constraint on further progress in many areas, including the delivery of rural services, social protection, education, health, and resource efficiency. The reasons for these problems are well-known: sub-national governments in China are responsible for a much larger share of spending than in most other countries. In the absence of significant net transfers from rich to poor regions or other revenue sources, large disparities in spending per person on public services are unavoidable. Moreover, income-poor but resource-rich provinces are currently not adequately compensated when their resources are extracted for national development. Reform of the intergovernmental fiscal system is required to fundamentally address the problem. Such reform would need to include higher net transfers via the center from rich regions to poor regions, notably through higher equalization grants, possibly combined with further changes in spending responsibilities between sub-national governments and the center. In addition, China should consider options for devolving more revenue

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sources that benefit poor regions. Higher resource taxes provide an opportunity to grant the poor provinces higher tax shares and make the poor provinces less dependent on fiscal transfers. Payments for environmental services (such as water, land conversion rights) could become revenue for the poor provinces as well.

2.36 Increased government spending puts a premium on the efficiency of spending. The recent increase in spending and introduction of many new initiatives call for more systematic and rigorous monitoring and evaluation frameworks. This involves more research and analysis to develop better monitoring indicators, focusing on results and quality, drawing on international experience and benchmarks; and developing a robust information system to track progress. More can be done to nurture a culture of evidence-based evaluation and building capacity for it. There needs to be better linkage between results of evaluations and adjustments in policies, priorities, and financing. In addition, stronger accountability is required, and the recent move to expand the local officials’ evaluation system to include objectives of the 11th 5YP should be helpful in this regard. Fragmentation of various programs, while probably unavoidable in a big country like China, calls for further efforts at consolidation and coordination.

2.37 Administrative tools need to be augmented by increased reliance on market incentives and regulatory means. So far, rapid progress has been achieved through administrative measures in the areas of energy efficiency and environmental pollution. However, this rate of progress may be difficult to sustain in the future without greater reliance on market incentives and the regulatory system, including the criteria used for performance evaluation of local government officials. There is increasing urgency in building a policy and institutional framework that uses market-based instruments to encourage rebalancing. Price reforms are called for, especially in the areas of energy and resources pricing and taxation, but China’s grain price policies may also need to be adjusted to bring domestic prices closer to international ones. Regulatory measures could include environmental emission standards, consumer products labeling, and fuel and building efficiency standards. Vigorous enforcement of regulations and standards will, of course, be equally important.

2.38 Economic policymakers will need to balance short-term macroeconomic considerations with medium and long term objectives and the strategic direction of reform. For example, policy makers need to balance the need to reduce inflation in the short term with the need to improve efficiency and reduce resource intensity and pollution. As discussed in Chapter 4, this is a particularly pressing issue for energy prices, where the 11th 5YP objectives of improving energy efficiency call for which pricing energy in line with scarcity. If, as many expect, international oil prices were to be sustained at high levels, Chinese retail prices of fuel would have to increase significantly. This can be done gradually. It would help considerably, though, if a calendar of price increases is announced in advance so that consumption and investment patterns have time to adjust accordingly.

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3. Optimizing and Upgrading of the Industrial Structure

Background and Key Objectives

3.1 Over the past three decades, China has experienced improvement in industrial structure made possible by market-oriented reform and opening up. The 10th 5YP period (2000-05) also witnessed significant progress in industrial structure upgrading. Between 2000 and 2005, the share of the primary industry in GDP dropped from 15.1 percent down to 12.5 percent; R&D as a share of GDP increased from 0.9 percent to 1.3 percent; the share of hi-tech industries in GDP rose from 2.8 percent to 4.4 percent; and labor productivity of Chinese industrial enterprises more than doubled in real terms.9, 10

3.2 The 11th 5YP aims to implement the “scientific development concept”, which entails a shift to economic growth based more on increases in efficiency and knowledge as opposed to input of resources. This requires fundamental changes in the industrial structure. Accordingly, one of the “policy orientations” of the 11th 5YP is: “Promoting development by relying on the optimization of the industrial structure, making the adjustment of economic structure as the central theme, promoting the shift of the economic growth pattern from one of industry-driven, quantitative expansion driven to one driven by coordinated development of the three industries and optimization and upgrading of the structure.”

3.3 Judging from the “Main Tasks and Strategic Priorities” the government sets itself in the 11th 5YP in the area of “optimization of the industrial structure”, the government sees improving competitiveness and upgrading industry as the key overall task here, with obtaining safe and clean energy as a smaller task.11

3.4 The main objectives in optimizing and upgrading the industrial structure in the 11th 5YP are:

A more rational structure of industries, products and industrial organization;

9 China’s data defines five sectors as “hi-tech industries”: (i) pharmaceuticals, (ii) aircrafts and spacecrafts, (iii) electronics and communication equipments, (iv) computers and office equipments, and (v) medical equipments and measuring instruments. 10 The productivity data refers to SOEs and large non SOEs. 11 These tasks are accelerate development high-tech industry (electronic, information, and manufacturing industries; bio industry; air space industry); equipment manufacturing industry (major technical equipment, automobile, shipbuilding); optimize energy industry, with conservation, with coal as basis, build stable, economic, clean and safe energy (coal, electric power, petroleum and gas, renewable); adjust raw material industrial structure and distribution (optimize metal industry, adjust distribution chemical industry); light and textile industry; informatization.

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Increases in the ratios of service sector value-added to GDP and service sector employment to total employment of 3 and 4 percentage points, respectively;

Enhancement of the capacity for indigenous innovation and a rise in the ratio of R&D to GDP to 2 percent;

Emergence of a troop of well-performing companies with self-owned intellectual property rights, well known brands and strong international competitiveness.

3.5 In operationalizing these objectives, the 11th 5YP also stipulates specific action plans for 15 industrial sectors in six chapters (Chapters 10-15) in Part III under the headline “Promoting Optimization and Upgrading of Industrial Structure”.12 These action plans are supplemented by 7 “special programs (zhuanxiang)” for hi-tech industries and 10 “priorities (zhongdian)” for equipment manufacturing industries. The content of these action plans can be viewed as a long “to-do” list. Examples include accelerate the development of hi-tech industries; build industrial bases of software, micro-electronics and optical electronics; raise the market share of automobiles with self-owned brands (zizhu pingpai); and build shipbuilding bases in Bohai circle, Yangzi river delta and Pearl River delta.

Evaluation of Developments So Far under the 11th 5YP

3.6 Optimization and upgrading of the industrial structure is difficult to measure objectively. In particular, there is no universal agreement on what constitutes an improvement of the industrial structure. In view of the structure of the 11 th 5YP and the constraint of data availability, this chapter adopts a combination of three approaches.

3.7 The first is to assess progress made in implementing the “to-do” list as spelled out by the 5YP itself. The rationale of this approach is that this list presumably defines the “optimized” industrial structure that policymakers had in mind.

3.8 The second is to look at the progress in achieving the overall objectives of the 5YP as measured by the three quantitative indicators defined in its Chapter 3 and Box 2, namely, the share of service sector in GDP and total employment, and the ratio of R&D to GDP.

3.9 The third is to go beyond the 5YP and look at some measurable indicators that could be seen as reflecting the overall soundness of the industrial structure. This evaluation looks at (i) progress in increasing productivity in industry and catching up with other countries and (ii) the return to capital of industry and employment creation.

12 The 5YP is followed by sectoral 5YPs, such as “the 11th 5YP for High and New Tech Industries” and the “11th 5YP for the Steel Industry”, which are in most cases detailed action plans for the sector concerned.

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Progress with the Tasks of the 11th 5YP

(i) Methodology

3.10 The to-do list contained in Part III of the 5YP is a long one. This chapter concentrates on 45 tasks as examples, selected from the to-do list contained in three of the six chapters, namely:

Chapter 10: Accelerating the development of hi-tech industries; Chapter 11: Revitalizing equipment manufacturing industries; and Chapter 13: Adjusting the structure and spatial layout of raw material

industries.

3.11 The 45 tasks are examples instead of forming a representative sample in statistical sense. Given the need to limit the scope of investigation, they are selected based on a number of considerations. First, the development of hi-tech, equipment manufacturing and materials industries jointly has a profound impact on the progress of the whole Chinese industry in closing the gap with the international technological frontier. That is because hi-tech industries tend to undergo the most radical technological change while equipment and material industries provide the basis for technological upgrading for all manufacturing industries and beyond. Second, Chapter 12 of the 5YP (Develop Energy Industry as a Priority) is not included since Chapter 4 of this report deals with energy efficiency specifically. Third, Chapter 14 (Raising the Level of Light and Textile Industries) and Chapter 15 (Promoting Informationalization Actively) are of a secondary importance compared with Chapter 10, 11 and 13 in that the upgrading of light and textile industries is less technology-intensive, and informationalization partially overlaps with the development of hi-tech industries. Within Chapters 10, 11 and 13, the 45 tasks are selected mostly in view of measurability of progress and data availability.

3.12 Results of the investigation are presented in Annex 3,13 where for each task evidences of implementation progress is presented, supplemented by information on relevant actions taken by the government when available. For summary measure of overall progress in implementation, a simple rating is applied that classifies progress with the tasks as satisfactory or questionable.

(ii) Results

3.13 This investigation suggests that overall progress in carrying out the tasks that the government set for China in the 11th 5YP to optimize the industrial structure is satisfactory. Out of the 45 tasks, the implementation progress of only 8 appears to be questionable.

13 Annex 3 draws on Yang Jianlong and others, “Evaluation of the Progress of 11th 5YP in Optimization and Upgrading of Industrial Structure”, background report prepared for the World Bank. March 2008.

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3.14 Accelerating the development of hi-tech industries. As indicated in Annex 3, hi-tech products such as integrated circuits, software, bio-pharmaceuticals, sub-line airplanes and satellite navigation services have registered significant output growth and technological progress appears remarkable in a number of important areas such as high-power computing, next generation internet, and non-grain based bio-energy. A major decision has been taken to launch China’s large airplane program. The pace of development of hi-tech industries has accelerated. However, given the experience during 2006-07, it does not appear realistic to reach the target set by the 11 th 5YP for Hi-Tech Industries of 10 percent of value added of hi-tech industries in GDP (Figure 3.1).

3.15 A look at the pace of developments prior to the 11th 5YP period suggests that the target may have been set too high.

3.16 Revitalizing equipment manufacturing industries. Strong growth has been achieved in the automobile and shipbuilding industries. Implementation progress in the priority areas as identified by the 11th 5YP is generally satisfactory. According to Annex 3, technological progress seems particularly significant in the manufacturing of environmental protection equipment. However, several targets of “localization (guochanhua)” or import substitution seem to be difficult to fulfill. For example, the domestic market share of automobiles with “self-owned” brands increased only by 1 percentage point in 2005-07 to reach 26 percent, compared with a target of over 50 percent by 2010. In the case of the market share of domestically made digital machine tools, the 11th 5YP target is 50 percent, while a gap of 19 percentage points remained in 2006 and the progress made in 2006 was only 0.6 percentage point.

3.17 Adjusting the structure and spatial layout of raw material industries. In the material industries, the objective is largely about consolidation and upgrading, including lowering energy and resource consumption, reducing pollution, and raising product quality, technology content and industry concentration. In the steel and construction materials industries, remarkable progress has been achieved in raising energy efficiency and reducing emission, as explained in greater detail in Chapter 4. However, in terms of “adjusting the structure”, progress generally appears to have been much greater in adding production capacity rather than in subtracting production capacity that is inefficient, highly energy consuming, and/or polluting. For example, in the aluminum industry, the production of aluminum oxide, which the 5YP requires to “develop”, nearly doubled in 2005-06, while that of electrolytic aluminum, which the 5YP wants to “control”, still

Figure 3.1 Share of Value-Added of Hi-Tech Industries in GDP, Realized and Targeted, 1995-2010

0

2

4

6

8

10

12

1995 2002 2004 2006 2008 2010

Percent of GDP

Source: National Bureau of Statistics: China Statistics Yearbook on High Technology Industry 2007, China Statistical Yearbook 2007

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grew by 21 percent in 2005-06. Most new projects that the 5YP stipulated to “build” have seen significant progress. There also appears to have been some reduction of “technologically backward capacity” of steel and cement. Moreover, steel sector reorganization moved along the direction of 5YP in terms of market share of the largest producers. However, large increase in that of the smallest producers has also been reported, and total production capacity grew by an average of over 15 percent per year in 2006-07, even though the 11th 5YP called for “strictly controlling new capacity” to contain growth. There are several reasons behind the massive expansion of production capacity in steel and aluminum. On the financing side, the ability to channel back increasingly large profits in full, combined with rapid loan growth, boosted investment. More generally, in the context of China’s rapid and industry heavy pattern of growth, enterprises had sufficient incentives to rapidly increase capacity in several sectors including steel and aluminum.

(iii) Interpretation and Evaluation

3.18 Improving the industrial structure typically calls for industrial policy. Industrial policy implies government intervention in the allocation of resources. It is controversial among economists and policymakers around the world. The better markets function, the weaker is the case for industrial policy. “Purists” say governments are generally not better than the market in identifying potential “winners” (companies or industries with good prospects that require help). Others say markets often do not function well enough to have potential “winners” thrive. In this evaluation, we do not take a strong stance either way. Nonetheless, the effectiveness and appropriateness of the policy actions taken does deserve an assessment.

3.19 The central question in this regard is: are we sure that the targets and tasks set in the 5YP really lead to improvement in industrial structure? What constitutes an improvement in industrial structure?

3.20 This is a valid concern for several reasons. First, for some of the listed targets the economic rationale may not be fully obvious. Many targets are about “make or buy”: higher production or lower imports. For such targets, it is not always clear that more production (less import) always means a better industrial structure. For example, it is often assumed good news when Chinese firms are able to make a product that they had to import before. However, no one would think it a good idea to try to make everything at home. Then there is a question of optimality: does the government have enough insight a priori to decide that it is good for Chinese firms to make machine A but continue importing machine B. If, in setting the target, the government misunderstands the market trend and the comparative advantage of Chinese producers, it might not be bad news if Chinese firms become able to make machine B but continue importing machine A.

3.21 Second, there may be conflict among some of the targets. Conflicts in targets are not unique to China’s 5YP. However, without weighing schemes or rules on how to make trade offs, it is not clear how to judge some actions. For example, when Shanghai Automobile takes over Nanjing Automobile, it helps achieving the target of “the

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emergence of some enterprises that have production capacity of over one million vehicles”. However, it makes it more difficult to achieve the target of 50 percent market share of “self-owned brands,” since Shanghai Automobile is not a producer of “self-owned” brands. Indeed, achieving the latter target would require fast expansion of producers such as Qirui and Geely, not the joint ventures such as Shanghai Automobile.

(iv) Program or plan? — How does the government steer the allocation of resources and intervene to carry out the tasks it set?

3.22 This 5YP is meant to be a program (guihua) instead of a plan (jihua). The term “plan”, which is the trademark of the pre-reform central planning economy, was deliberately replaced with “program” to highlight the intention of having a 5YP that fits a market economy. However, in the area of improving the industrial structure, the delineation between government involvement and the activities of enterprises and the market is not very clear. Since improving the industrial structure is in part about improving the resource allocation among industries, sectors, and products, a “program” should leave a sufficiently large role for the market to play. Indeed, in most of the examples included in Annex 3, enterprises are in principle supposed to lead the activities in the “to do list”, with the government having a facilitating role. However, a program should express the government’s expectation of economic developments instead of setting targets/tasks for enterprises and the market. Nonetheless, the 11th 5YP has many such targets/tasks.

3.23 Even if the 5YP sets detailed targets/tasks, it could have been far from a “plan” if the government has few instruments to implement its intention. If the government is unable to intervene in the microeconomic decision making of enterprises and consumers, the targets/tasks it set in the 5YP, no matter how intrusive, would remain no more than an expectation, or projection. How much the 5YP departs from a “plan” is a function of the instruments the government is able and/or willing to use to implement its targets. By this standard, Chapters 10, 11 and 13 of Part III of the 11th 5YP are perhaps somewhere in between a “program” and a “plan”. A conclusive analysis would require systematic evidence which is mostly not in the public domain, but anecdotal evidence indicates that the government could and did play a powerful role in resource allocation to implement the 5YP targets on industrial structure changes.

3.24 The principal instruments used by the government to direct resource allocation in order to “optimize the industrial structure” are the following:

Project approval appears to be most powerful one. While the recent reform of the “investment system” has changed government “approval (shenpi)” of investment projects into “review and permission (hezhun)”, in practice the difference seems to have been insignificant. And it is the 5YP and subsequently approved 5YPs for specific industries and sectors that provide the basis for the government decision in its “review and permission”. A project that has failed to get “review and permission” from the government will be tremendously disadvantaged compared with others that have obtained

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it, for example, in getting access to land, bank loans and the stock market. Government investment is another instrument that is often employed jointly

with project review and permission. For example, when the government “organizes the implementation (zuzhi shishi)” of a program, it often means approval of certain projects (and disapproval of others) in combination with government investment in them.

Production and import licenses are also important instruments. For example, disqualification of 116 automobile producers (see Annex 3) is one step taken to protect and increase market shares of large producers. Similar intentions appear to be behind the proposed introduction of licenses for shipbuilding. In the case of the steel and cement industries, government action has gone far beyond licensing. It organized the work of dismantling steel making devices and melting them in furnaces. Import licenses are used to protect domestically made equipment manufacturers from foreign competition, as for example in the case of petro-chemical equipment detailed in Annex 3.

3.25 These direct interventions are supplemented by more indirect instruments such as tax incentives, price subsidies, and other kinds of “favorable policies”.

3.26 The extensive government involvement in resource allocation through direct and indirect intervention in microeconomic decision-making does help further the objectives of the 11th 5YP. At the same time, it raises questions about the optimality of resource allocation and the meaning of the observed implementation progress because it inevitably suppresses the roles of consumers, producers, and market signals in resource allocation. It is true that extensive market failures exist in China’s economy today, due to externalities and under-developed markets. However, the market failure rationale of most targets in Part III of the 5YP does not appear to be clear.

Progress in Meeting the Overall Targets of the 11th 5YP

3.27 The objectives of optimization and upgrading the industrial structure contain three quantitative indicators. They are: the shares of the service sector in GDP and total employment, and the R&D to GDP ratio.

3.28 Service sector. Based on recent trends, the target of a 3 percentage points increase in the share of the services sector in GDP is not going to be achieved (Figure 3.2). On the other hand, the target of a 4 percentage points increase in the share of the service sector in employment appears to be achievable. Again, this raises question about the rationale of the targets themselves, which seem to assume a relationship of 3:4 between the two indicators. Such a relationship did not exist in the past (Table 3.1). There could be two alternative interpretations of the results. First, the declining share of the service sector in GDP shows that the services sector remains underdeveloped and its share in employment could have been higher. Second, the rising share of the service sector in total employment reflects the right allocation of labor among service sector and non-service sectors, and the declining share of service sector in GDP is not necessarily

26

something to worry about. Further study is required to identify which of these is the right interpretation.

Table 3. 1 Changes in the Shares of Tertiary Industry in GDP and Employment (percentage points)

Year 2000 2001 2002 2003 2004 2005 2006GDP 1.01 -0.23 -0.85 -0.44 -0.59 1.01 -0.23Employment 0.90 0.70 1.30 0.80 0.80 0.90 0.70 Source: National Bureau of Statistics, China Statistical Yearbook.

3.29 R&D expenditure. Continuing a clear upward trend, R&D as a share of GDP increased continuously during 2001-06 (Figure 3.3). If this trend continues, the target of 2 percent of GDP by 2010 can be achieved. Business enterprises have been an important driving force behind this trend. From 2003 to 2006, the share of business enterprises as a source of R&D funding increased by 9 percentage points, while that of the government dropped by over 5 percentage points (Table 3.2). This reflects the ongoing transition of China’s innovation system from a government-led model to an enterprise-led model.

Figure 3.2 Percentage Shares of the Tertiary Industry in GDP and Total Employment, Realized and Targeted, 2000-2010

20

25

30

35

40

45

50

2000 2002 2004 2006 2008 2010

Percent

GDP

Employment

Source: National Bureau of Statistics, China Statistical Yearbook

Figure 3.3 R&D Expenditure as Percentage of GDP, Realized and Targeted, 1995-2010

0

0.5

1

1.5

2

2.5

1995 1997 1999 2001 2003 2005 2007 2009

Percent of GDP

Source: National Bureau of Statistics, China Statistical Yearbook on Science and Technology, 2007. Table 1-8.

3.30 This trend is likely to continue, not only because of the government’s determination to promote indigenous innovation led by enterprises, but also because of the competitive pressures facing Chinese enterprises. Despite the emergence of Chinese enterprises as strong competitors in the global market, China’s industry as a whole is still in an early stage of technological catch-up, and the gap to the international technological frontier remains large. Currently, the global competitiveness of China’s leading manufacturing sectors rests upon low input costs, scale of production, technology absorption, speed of response to market demands and in the fulfillment of orders, and increasing attention to quality (Yusuf and others 2005). Most leading Chinese enterprises remain manufacturers and assemblers of products without possessing core technologies. Even in joint ventures, core technologies mostly remain controlled by the foreign

27

partners. China’s export growth has been largely based on the expansion of low-wage manufacturing utilizing imported components, equipment and technology (OECD 2007). This has generated considerable pressure on Chinese firms to scale up their innovation to ensure sustainable competitiveness. And such pressure is likely to further increase.

Table 3.2 China’s R&D Expenditure by Source of Funding, 2003-2006

Year Total R&D (billion RMB)

% by SourcesGovernment Enterprises Foreign

SourcesOther Sources

2003 154.0 29.9 60.1 1.9 8.02004 196.6 26.6 65.7 1.3 6.42005 245.0 26.3 67.0 0.9 5.72006 300.3 24.7 69.1 1.6 4.6

Source: National Bureau of Statistics: China Statistical Yearbook on Science and Technology, Table 1-10, various years.

Soundness of the Industrial Structure — How to Measure Progress over Time?

3.31 What indicators can be used to measure the soundness of the industrial structure?

Productivity is often used to compare how advanced one industrial structure is compared to another. Since 1978, China has caught up steadily with middle and higher income countries in terms of productivity in industry and the overall economy. This is the case for labor productivity and total factor productivity (OECD (2005), He and Kuijs (2007), Bosworth and Collins (2007).14

Rodrick and Hausman (2005) look at the sophistication of exports. Using their constructed weighted sophistication of exports, they find that the degree of sophistication of China’s exports is high compared to its level of GDP per capita. However, they also found that the degree of sophistication did not change much over time. One caveat with comparing the sophistication of gross exports across countries is that China has a relatively large share of processing exports, which have a high import content and modest domestic value added. Amiti and Freund (2008) found that China’s exports increased more than five times during 1992-2005, and its structure transformed dramatically. The shares of agriculture and light manufacturing such as textiles declined significantly; and the share of more sophisticated manufacturing products such as consumer electronics, appliances, and computers has grown. However, a large component of its export growth in hard manufacturing has been in processing trade. The skill intensity of China’s exports remains unchanged since 1992 once processing trade is excluded. Nonetheless, being able to handle sophisticated processing exports is an asset and requires hard and soft infrastructure. In other words, it may not

14 Annex 3 tables 1 and 2 of He and Kuijs have an overview of research results on China’s overall productivity improvements and a comparison with other countries.

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be necessary to discard processing trade completely in such analyses. Cörvers and Meriküll (2007) look at the occupational structure of countries’

workforces, measuring the skill intensity.

Pender, in work for the European Commission, designed 3 types of taxonomies of manufacturing industry, based on (i) factor input combinations; (ii) skill requirements, and (iii) external service inputs.

(i) Labor Productivity

3.32 Labor productivity in Chinese industry continued to catch up with middle and high income countries between 2005 and 2007, as shown in the Table 3.3. During this period, labor productivity of Chinese industry increased by 22 percent, compared with 11 percent for middle income countries, 4 percent for high income countries and 3 percent for the USA.

Table 3.3 Labor Productivity in China’s Industry, an International Comparison (Constant US$ 2005, using GDP PPP)

Countries 1995 2000 2005 2006 2007China 5,435 9,449 11,112 11,852 13,582 Middle income countries 10,198 13,666 17,352 18,692 19,323 High income countries 49,593 55,408 61,515 62,076 63,749 USA 58,352 63,365 73,816 73,420 75,804 Source: WDI, NBS, CEIC, and staff estimates.

3.33 Both SOEs and non-SOEs have recorded continued strong labor productivity growth (Figure 3.4). However, SOEs have been particularly aggressive in raising labor productivity. They overtook non-SOEs around 2000 and managed to widen the gap further in the following years. This was made possible by a combination of large scale lay-offs in the SOE sector and rapid capital deepening because of heavy investment. Large lay-offs reduced industrial SOEs’ employment from 37.5 million in 1998 to 18.0 million in 2006. Total fixed assets of industrial SOEs nearly doubled in real terms in this period. The result is a similar widening gap between SOEs and non-SOEs in terms of capital intensity, as shown in Figure 3.5.

3.34 The continuous improvement in labor productivity and catch-up with more advanced economies suggests upgrading of the industrial structure. At least, there are no serious barriers or weaknesses that block the rise in labor productivity. On the other hand, the significant gaps between SOEs and non-SOEs in labor productivity and capital intensity suggest the possibility of a significant role of capital investment and labor shedding in pushing up labor productivity of SOEs. This makes it necessary to look at two alternative indicators.

Figure 3.4 Labor Productivity in China’s Industry, 1998-2006

Figure 3.5 Capital Intensity in China’s Industry 1/

29

02

468

10

121416

1820

1998 1999 2000 2001 2002 2003 2004 2005 2006

SOEs

Non-SOEs

10,000 RMB per person

Source: China Statistical Yearbook, various years

0

5

10

15

20

25

30

35

1998 1999 2000 2001 2002 2003 2004 2005 2006

SOEs

Non-SOEs

10,000 RMB per person

Source: China Statistical Yearbook, various years. 1/ Fixed assets per worker.

(ii) Alternative Indicators

3.35 Additional insight in the soundness of the industrial structure can be obtained by measuring the return to capital and job creation of industrial enterprises. The return to capital is a proxy of the operation efficiency of enterprises, and a low return on capital often reflects an unsound industrial structure. For instance, excessive capacity in a sector typically leads to low profitability and an inefficient firm size increases cost. Technological backwardness often places a firm in a low value added position in the value chain, which may also lead to low and declining profitability if it fails to reflect the comparative advantage of the country. Of course, as is the case for many other indicators, return to capital is not a perfect one. Distortions in prices and barriers to entry and exit may reduce the meaningfulness of indicators such as revenue, cost and profit. Nonetheless, they remain useful proxies given data constraints. Job creation is a useful proxy to gauge the extent to which the existing industrial structure reflects China’s comparative advantage and contributes to the nation’s welfare.

(iii) Return to Capital

3.36 Two indicators are used to measure return to capital: the ratio of total pre tax profit to total owners’ equity, and the ratio of the sum of total pre tax profit and total financial expenses (mainly interest expenses) to total assets (Figure 3.6).15 Both indicators show that the improvement in return to capital of Chinese industrial enterprises since 1998 continued in 2006 and probably stabilized in 2007. However, Figure 3.7 shows that non-SOEs outperform SOEs in return on capital, although the gap is smaller now than it used to be. Since the data for 2007 are not strictly comparable with previous years, the trend in 2007 needs to be confirmed later with annual data.

15 This data covers all state owned and controlled industrial enterprises and non-state industrial enterprises with annual sales revenue over RMB5 million. Data for 2007 cover the first 11 months.

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3.37 In sum, return to capital indicators suggests that the soundness of industrial structure has improved steadily since 1998 and the trend has continued since the 11th 5YP. That capital per worker is consistently higher in SOEs while the productivity of capital is lower in SOEs may suggest imperfections on the capital market that prevent capital from going to where it is most productive. One caveat, though, is that these findings are not adjusted for industry effects. Some industries are by nature more capital intensive than others, and several capital intensive industries are dominated by SOEs in China.

Figure 3.7 Return to capital of Industrial SOEs and Non-SOEs (above cut-off scale), 1998-2007

0

2

4

6

8

10

12

14

16

18

1998 1999 2000 2001 2002 2003 2004 2005 2006

Rate of return on equity 1/

SOEs

Non-SOEs

0

1

2

3

4

5

6

7

8

9

1998 1999 2000 2001 2002 2003 2004 2005 2006

Rate of return on

total equity 2/

SOEs

Non-SOEs

Source: National Bureau of Statistics: China Statistical Yearbook, various years. 1/ Profit/equity; 2/ (Profit + interest costs)/ total capital

(iv) Job Creation

3.38 Until recently, Chinese SOEs suffered from severe over-staffing. SOEs created jobs but only at the expense of a low return to capital. After massive downsizing of the SOE labor force in the second half of 1990s, this problem has been largely resolved. However, China needs not only high return to capital but also job creation. The challenge is to create jobs in a way that enhances the return to capital as well.

3.39 Capital intensity in China’s industrial enterprises increased in 2006, continuing a trend since 1998 (Figure 3.8). However, the rate of job creation is much slower than that of output growth and fixed assets growth.

Figure 3.6 Return to capital of Chinese Industrial Enterprises, 1998-2007

0

4

8

12

16

20

1998 1999 2000 2001 2002 2003 2004 2005 2006

Percent Profit/Sales

Return on equity 1/

Source: National Bureau of Statistics: China Statistical Yearbook, various years. 1/ Profit / (Assets – Liability)

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3.40 A close look at SOEs and non-SOEs separately is revealing (Figure 3.9). Employment of non-SOEs has grown largely hand-in-hand with output and fixed assets. SOEs have been shedding labor continuously even as output and fixed assets grew strongly. These general trends showed no significant change in 2006.3.41 Overall, the data suggest that non-SOEs may have been able to create more jobs while enhancing labor productivity and the return to capital. SOEs, on the other hand, appear to have been able to raise labor productivity and the return to capital largely by increasing capital intensity and shedding labor. With the return to capital generally lower in SOEs than in non-SOEs, the constant increase of capital intensity of SOEs raises concerns about the efficiency of resources allocation. Excessive capital intensity that fails to reflect China’s comparative advantage would be a serious flaw in the industrial structure. On the labor market, it is possible that the high price of labor for SOEs—because of social security charges—discourages their demand for labor. However, it would take a more in-depth investigation to confirm the validity of these assertions.

Figure 3.9 Growth of Fixed Assets, Output and Employment of Chinese Industrial SOEs (left) and Non-SOEs (right), 1998-2006

0

1,000

2,000

3,000

4,000

5,000

6,000

1998 2000 2002 2004 2006

RMB billion, 10,000

persons

Fixed AssetsIndustrial Value AddedEmployment

0

1,000

2,000

3,000

4,000

5,000

6,000

1998 2000 2002 2004 2006

RMB billion, 10,000

persons

Fixed AssetsIndustrial Value AddedEmployment

Source: National Bureau of Statistics: China Statistical Yearbook, various years.

Figure 3.8 Growth of Fixed Assets, Output and Employment of Chinese Industrial Enterprises, 1998-2006

0

2,000

4,000

6,000

8,000

10,000

12,000

1998 2000 2002 2004 2006

RMB billion, 10,000

persons

Fixed Assets

Industrial Value Added

Employment

Source: National Bureau of Statistics: China Statistical Yearbook, various years.

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Concluding Remarks

3.42 Key findings are the following:

The overall progress in carrying out the tasks that the government set for China in the 5YP is satisfactory. The 5YP tasks appear to be achievable in most areas examined, although there are also cases where progress has been slow and it does not appear to be realistic to achieve the targets.

However, the extent to which progress in implementation improves the industrial structure as expected is questionable. First, the economic rationale for many listed tasks is not fully obvious. Second, there is conflict between some tasks.

Anecdotal evidence points to continued extensive government involvement in resource allocation through direct and indirect intervention in microeconomic decision making. This helps achieving progress in 5YP implementation but casts some doubt about the value of such progress in terms of improving the industrial structure. The authorities may reconsider to what extent a list of detailed “tasks” to be carried out is the right approach in an increasingly market determined and private-sector led economy.

In terms of the three quantitative objectives of the 5YP regarding industrial structure, two of them appear to be achievable, namely, a 4 percentage point increase in the share of the service sector in total employment, and a 2 percent R&D to GDP ratio. However, unless the trend observed since 2003 is reversed in the coming three years, it seems unlikely that the share of the service sector in GDP could be raised by 3 percentage points. However, caution is required again in interpreting this. In setting the targets, the 5YP implicitly assumes a 3:4 relationship between the percentage point changes in the shares of service sector in GDP and employment, which does not seem to correspond to historical experience.

Looking at labor productivity in industry, China has continued to make progress in improving the industrial structure in 2005-07, and the catch-up momentum remains strong. However, the role of rising capital intensity of SOEs, a result of labor layoff and capital investment, seems to have contributed significantly to this trend.

In terms of return to capital, the first two years of the 11th 5YP have seen no significant change in the general trend since 1998. Both SOEs and non-SOEs registered remarkable improvement in the return to capital. However, the return to capital in SOEs remains lower than in non-SOEs.

SOEs and non-SOEs differ sharply in terms of job creation. Non-SOEs have been able to combine job creation with a high return to capital. SOEs, on the

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other hand, appear to have been able to raise labor productivity and increase the return to capital partly by increasing capital intensity and shedding labor. With the return to capital generally lower in SOEs than in non-SOEs, the constant increase of capital intensity of SOEs raises serious concerns about the efficiency of resource allocation to SOEs. Excessive capital intensity that fails to reflect China’s comparative advantage would be a serious flaw of the industrial structure. Further study is required to confirm this.

3.43 Broadly speaking, despite the difficulty in defining an improvement in industrial structure, these findings point to satisfactory overall progresses in implementing the 5YP tasks and targets, and a largely sound industrial structure as of 2006-07. Weaknesses and flaws exist in industrial structure, but they have been not significant enough to cause a fall in labor productivity, return on capital and job creation of industrial enterprises. However, the government is advised to review its role in setting specific tasks and targets in the area of industrial structure vis-à-vis the role of consumers, producers and the market, in relation to the instruments that are available in implementing them. It is likely that the role of the government in microeconomic decision-making regarding the industrial structure has been excessive. With the increased market orientation of China’s economy, industrial upgrading is best pursued by measures that encourage innovation such as improved IPR, venture capital markets, better governance of SOEs, and greater access of private firms to capital markets.

3.44 This chapter also raises two specific issues that deserve further study. The first is the optimal level of service sector development in terms of its share in GDP and employment given China’s current stage of development. The second is the soundness of the rising capital intensity of industrial SOEs in comparison with their non-SOEs counterparts. Finally, much of the data for 2007 is not available yet, and two years is too short for some actions to have impact on the soundness of industrial structure. The assessment made in this chapter is therefore only preliminary.

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4. Increasing Energy Efficiency

Background and Key Objectives

4.1 China’s energy consumption during the 10th 5YP was much higher than envisaged. China’s primary energy consumption rose by an average 9.9 percent per year between 2000 and 2005, more than twice as fast as during 1980- 2000, reaching 2217 million tons of coal equivalent (mtce). By 2006 it already exceeded the higher bound projection for 2010 made in the early 2000s by various agencies. This is partly due to sustained high economic growth of more than 9 percent over the six year period, two percentage points higher than expected. However, the other key reason is that the contribution of industry to growth was particularly high during the 10 th 5YP. As a result, China’s energy intensity, as measured by the elasticity of energy consumption growth to GDP growth, rose above 1 during the 10th 5YP, more than twice the average elasticity during the four preceding five-year plans. As a result, the energy intensity of China’s economy, after a long period of steady decline, shows signs of stagnation and even slight increase.

4.2 If recent energy consumption patterns continued, they would pose major challenges to China. If China’s economy were to grow at an average of 7.2 percent per year and the average energy intensity remains at 1 in the next two and a half decades as experienced by the developed and newly industrialized countries during the early stage of industrialization, China’s energy consumption would reach around 12,750 mtce by 2030, equivalent to about 87 percent of world’s total energy demand today. That would bring per capita energy consumption to about 75 percent of the current US level. Energy use on this scale would depend to a considerable extent on massive coal consumption, which ultimately would result in unacceptable environmental damage through emissions of GHGs and other pollutants.

4.3 China’s government recognizes the energy and environmental challenges. China is determined not to follow the development path of the industrialized countries, pursuing a less energy intensive development path with energy consumption growth lower than economic growth to the greatest extent possible. This would make China’s fast growth more sustainable with lessened adverse domestic and global environmental impacts. Accordingly, the 11th 5YP sets an ambitious target of a 20 percent reduction in energy intensity. The Plan also incorporates seven additional indicators on water saving and pollution control. This was the first time that quantitative indicators for energy efficiency have been incorporated in a five-year plan.

Setting and Allocating the Target

4.4 The 11th 5YP emphasizes that policies will be developed to promote energy saving and efficient energy utilization. Three types of energy savings are identified: (i)

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structural, resulting from rebalancing the economic and industrial structure, particularly reducing the share of energy intensive industries; (ii) technical, through technical progress to reduce energy consumption per unit of product; and (iii) managerial, by reducing energy waste during energy production, transportation, and consumption through strengthening regulatory and administrative institutional capacity. The Plan calls for concerted efforts to reduce energy use in key energy intensive sectors such as iron and steel, non-ferrous metals, coal, electric power, chemical, construction material as well as in the transportation sector. The Plan also highlights the role of pricing in promoting resource saving and calls for “the development of a pricing mechanism which would reflect supply and demand and the scarcity value of resources, so as to let market force play a fundamental role in allocating resources.”

4.5 The Plan does not discuss how the energy efficiency target/indicators are to be achieved. There is no explanation of how the target of a 20 percent reduction in energy intensity was derived, nor the contributions expected from the energy saving factors identified above, the potential saving from the key energy intensive industries, and the institutional and policy changes that are required. No studies seem to have been done to determine what can be realistically achieved before the target was adopted. It appears that the target was based on some general considerations, including: (i) China has one of the most energy intensive economies in the world, and, using market exchange rates, China’s energy consumption per unit of GDP is 3-8 times higher than in OECD countries; (ii) China had previously achieved an average of 4.1 percent reduction in energy intensity per year over a 20 year period (1980-2000).

4.6 Several studies were conducted subsequently to determine how the 20 percent reduction might be achieved and what might be the contributions from each of the key factors. The most detailed one was done by a consortium headed by China Development Research Center and funded by the Energy Foundation, a US NGO. The key conclusions of the study are:

It is very difficult, but not impossible, to achieve the 20 percent reduction in energy intensity in a five year period;

The probability of achieving the target depends on the pace of economic growth: the higher growth, the lower the probability, as during periods of high growth the contribution of industry to growth tends to be particularly high;

Contributions from both technical progress and structural adjustment are needed;

In the past, the contributions from technical progress varied from 31 percent to 54 percent and from structural change from 45 percent to 69 percent, depending on economic growth (varying from7.5 percent to 9.5 percent), the higher growth, the higher the contribution from technical progress;

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If GDP grows at an average annual rate of 9.5 percent or more, much stronger actions and policies than currently available are required to achieve the 20 percent reduction.

4.7 During the 1980-2000 period, China’s energy intensity declined by 4.1 percent per year on average. This was achieved even though overall growth as relatively rapid, in large part because the contribution of industry to growth was lower than in 2000-05. As a result, the contributions to the reduction in energy intensity from technical progress and structural change are considered to be 30-40 percent and 70-60 percent respectively.

4.8 The energy efficiency target was allocated at the provincial level in view of China’s strong administrative framework at the provincial and local levels. The central government requested each province to propose its own target. Most provinces proposed to follow the central government’s target of 20 percent, but four provinces proposed higher targets and seven provinces proposed lower targets. Then NDRC then accepted those provinces which committed to a 20 percent or higher reduction, and negotiated for higher targets with provinces which had committed to less than 20 percent. The final commitment by each province approved by the State Council is shown in Table 4.1

Table 4.1 Provincial Energy Intensity Reduction Targets during the 11th 5YP Period

Region Base data 2005

(tce/1000 RMB)

Target for 2010

(tce/1000 RMB)

Reduction (%)

Region Base data 2005

(tce/1000 RMB)

Target for 2010

(tce/1000 RMB)

Reduction (%)

Whole China 12.2 20 Henan 13.8 11.0 20Beijing 8.0 6.4 20 Hubei 15.1 12.1 20Tianjin 11.1 8.9 20 Hunan 14.0 11.2 20Hebei 19.6 15.7 20 Guangdong 7.9 6.6 16Shanxi 29.5 22.1 25 Guangxi 12.2 10.4 15Inner Mongolia

24.8 18.6 25 Hainan 9.2 8.1 12

Liaoning 18.3 14.6 20 Chongqing 14.2 11.4 20Jilin 16.5 11.6 30 Sichuan 15.3 12.2 20Heilongjiang 14.6 11.7 20 Guizhou 32.5 26.0 20Shanghai 8.8 7.0 20 Yunnan 17.3 14.4 17Jiangsu 9.2 7.4 20 Tibet 14.5 12.8 12Zhejiang 9.0 7.2 20 Shaanxi 14.8 11.8 20Anhui 12.1 9.7 20 Gansu 22.6 18.1 20Fujian 9.4 7.9 16 Qinghai 30.7 25.5 17Jiangxi 10.6 8.5 20 Ningxia 41.4 33.1 20Shandong 12.8 10.0 22 Xinjiang 21.1 16.9 20

Source: China Energy Net. Note: Unit GDP Energy Intensity is based on GDP in constant prices of 2005.

4.9 Such an allocation process has advantages and disadvantages. No feasibility studies or cost-benefit analyses were done to guide this allocation. Thus, while the provincial allocation may be the only practical way to get the local government involved and made it accountable, this process may not be optimal from the

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perspectives of equity and efficiency. This is because such an allocation does not consider the diverse economic, industry, and energy production and consumption conditions in the various provinces which significantly affect the energy saving potentials and the comparative benefits and costs of achieving energy saving in the various provinces.

Main Initiatives

4.10 The central government has rolled out a series of policies to support the ambitious goals on energy efficiency. These include: (i) a work programming and accountability system under which responsibilities for delivery of energy savings are assigned to relevant agencies, top energy users, and provincial governments, with clear accountability for execution; (ii) the Structural Adjustment Program of Industries, which aims to impose greater discipline over the expansion of new capacity in energy intensive industries and to phase out existing inefficient capacity quickly; (iii) the 1000 Large Industrial Enterprises Energy Conservation Action Plan, to develop and implement specific energy conservation programs in the largest industrial energy consumers, accounting for about 30 percent of total primary energy consumption; and (iv) the 10 Key Energy Conservation Projects, covering major energy efficiency technologies in manufacturing, transportation, commercial and residential buildings, and public facilities.

(i) Institutional and Legal Initiatives

4.11 In order to strengthen the leadership over energy efficiency, the government has set up an institutional framework all through its administrative system. At the national level, a leading group headed by the prime minister was set up to provide the overall guidance and leadership. A working group responsible for daily work was established at the NDRC. At the provincial, municipal and even county level, the governor or mayor typically heads a leading group to be responsible for implementing and achieving the local energy intensity reduction targets. In many cases, no new full time institutes specialized in energy efficiency were created and the actual number of staff dedicated to energy efficiency work at the various levels has not increased much. The actual work is done by existing officials in the NDRC or economic trade commission at the provincial level. Clearly there is a further need to empower the existing agencies or create new dedicated agencies and increase the number of professional staff dedicated to energy efficiency at the various levels.

4.12 In order to support the energy efficiency policy and program implementation, the government also took initiatives to develop the necessary legal framework. A revised Energy Conservation Law became effective. The Renewable Energy Law became effective on January 1, 2006 and several associated implementation regulations and rules were promulgated thereafter. A new Energy Law was drafted and is under discussion. A new Circular Economy Law is also being prepared.

(ii) Regulatory and Administrative Tools

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4.13 So far, the government has largely relied on administrative and regulatory tools to achieve the 20 percent reduction in energy intensity. The key administrative tools include: (i) administrative orders stipulating the achievement of the target for the provinces and key state-owned enterprises; (ii) controlling the supply of land and capital, and tightening project approval to curb the expansion of capacity of energy intensive industries like iron & steel, cement, aluminum, lead, paper, flat glass, chemicals, coke; (iii) setting energy efficiency standards for new production capacity in the above key sectors; (iv) ordering the closure of inefficient production capacity (below certain size and belonging to a certain category) in the above sectors; (v) encouraging mergers and acquisitions to form larger corporations so as to achieve economic scale.

4.14 The main regulatory tools include: (i) policies guiding investment in various sectors; (ii) decrees and instructions guiding structural adjustment in the key industrial sectors; (iii) more stringent environmental standards; (iv) energy efficiency standards for buildings, consumer products, and vehicles; and (v) energy consumption reporting and auditing.

(iii) Fiscal and Financial Incentives

4.15 The central government established special funds to support energy efficiency and emission reduction. In 2007, RMB 12 billion in fiscal support was provided for this purpose, including RMB 7 billion in central government support for energy efficiency activities in the 10 Key Energy Conservation Projects, particularly waste heat recovery, optimization of the energy metering system, rehabilitation of industrial boilers and kilns, and renovation of electric motor systems; RMB 2 billion in fiscal transfers to support the closure of inefficient production capacities; RMB 3 billion for statistical work in the energy area, including to monitor consumption. The funds were provided to enterprises in the form of grants with the amounts based on the expected energy savings.16

4.16 In addition, a state bond of RMB 5.4 billion was issued with the proceeds provided as loans to enterprises at subsidized interest rates to support energy efficiency and emission reduction projects. Furthermore, the PBOC encouraged domestic banks to increase their lending for energy efficiency and emission reduction projects.17 Also, controls were tightened on lending to projects in the key energy intensive sectors like steel, cement and aluminum.

16 The procedures and criteria for the allocation of the special funds were specified in the joint MOF and NDRC document “Management Method for the Fiscal Budget for Energy Efficiency” issued in July 2007.17 As per the PBOC document “Guiding Opinion for Improving and Strengthening Financial Services to Energy Saving and Emission Reduction Activities” issued on June 26, 2007.

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(iv) Price and Tax Initiatives

4.17 Energy Price: Although the government has repeatedly called for reform of energy pricing so that the price reflects the full cost of supply, including environmental cost, and should be determined by the balance of supply and demand, reforms in this direction has been limited to date.

4.18 Since late 2005 price controls on coal have now been largely removed, and coal prices are now able to freely adjust to fluctuations in supply and demand. As a result, the industry is more profitable than ever before in its history, earning an estimated US$8.6 billion in 2006. The spot coal prices along the coastal areas are now higher than prices of coal imported from Australia and other Asian countries and make it more attractive for large consumers in the coastal area to import coal. But power prices are still constrained by government controls and are unable to respond similarly which means that coal market efficiencies are not being transmitted across the energy sectors. Government also retains the right to intervene in coal prices if it deems it necessary.

4.19 However, currently the coal mine enterprises are not paying the full costs of coal production, in particular, the mitigation costs of social and environmental impacts. Subsidence and coal wastes caused by underground mining have damaged land, surface transport infrastructure, surface water courses and underground aquifers. A study in Shanxi province on environmental mitigation costs suggested an average deficit of US$5.4/t of coal mined. Coal mines also greatly under-invest in safety measures. Average fatal accident rates in China’s coal mines are still two orders of magnitude higher than those in Australia, though the situation is improving. Health issues even receive less attention than safety in coal mines although substantially more workers are affected by chronic lung disease than are killed in accidents. The resulting direct and indirect costs of lung disease could amount to over US$ 6.5 billion per year, equivalent to an average of US$1.5/t, which is currently paid by the state and society.

4.20 The government took some actions to include environmental costs in electricity pricing. Electricity price for power plants with FGD facilities was increased by 1.5 fen/kwh as compared with power plants without FGD facilities to account for the additional costs of SO2 removal. Electricity from cleaner energy source like wind, biomass, nuclear and gas is allowed to charge much higher prices than electricity from coal to make them attractive for investors. A few specific pricing measures were also adopted to reduce energy consumption and promote efficiency: (i) the NDRC ordered the termination of all preferential electricity prices offered by the local governments to energy intensive industries, which were once used as a key incentive policies by local government to attract investment in heavy and chemical sectors; (ii) NDRC ordered an increase of the price of electricity for energy intensive industries which are considered to be too small in scale and inefficient. Such discriminative price policy may have been effective in accelerating the closure of small scale production capacities, but may not be considered fair in an economic sense. All consumers with the same load profile should face the same electricity price which reflects the full costs of supply, regardless the size of the consumers.

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4.21 But overall, the prices of key energy products are still tightly regulated by the government, and they do generally not reflect the scarcity of energy. The government intended to liberalize oil product price and developed a new pricing mechanism to link domestic retail gasoline prices to the market prices of crude oil in the international market. However, the mechanism has not been implemented yet due to rising inflation in recent years. The prices of oil products (gasoline and diesel) were adjusted only a few times during 2006-08, lagging by a large margin the rise in the price of oil (Figure 4.1).

4.22 As a result, retail prices of gasoline and diesel are too low to cover the costs of crude import, refinery and distribution, resulting at times in large losses for the state-oil companies and substantial subsidies from the government budget. China’s gasoline and diesel prices are low in comparison to other countries, both developed countries and developing countries. The low prices for energy accentuate China’s industry-heavy pattern of growth and prevent the rebalancing of the pattern of growth desired by the government.

4.23 Both wholesale and retail prices of electricity are tightly controlled by the government and any change is subject to approval by NDRC. Through many years of power sector reform, the average consumer price for electricity was brought close to the long-run marginal cost of power supply in early 2000s. However, during the past two years, modest price adjustments lagged far behind increases in the costs of electricity supply, including costs of fuel, labor and emission control facilities.18 As a result, the average profit margin of the electric power sector, which was already very low with a rate of return on net assets of around 5 percent, dropped by 65 percent in 2007. Although electricity tariffs were raised somewhat in 2008, significantly larger adjustments are required to restore the financial sustainability of the power sector.

4.24 Resource tax: Traditionally, China’s natural resources, including coal and oil, were allocated to state-owned companies for development at no costs. The concept of a resource tax was introduced with market reform, but the level of resource taxes have been kept very low. The resource tax charged to coal and petroleum companies are also fixed, while in most other countries it is linked to the market price of the resources. For

18 For instance, according to the big five generation companies, their average cost of electricity generation increased by 27 percent alone in 2007.

Figure 4.1 Oil price and domestic gasoline prices

Source: CEIC.

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example, in other main coal-producing countries such as the U.S. and Australia, the royalty on underground coal ranges from 5 percent to 8 percent of mining revenue. In China, it is between 2.5-3.6 RMB/ton, about 1 percent of the sales revenue at the current coal price. Given the need to contain energy use, the resource tax on coal should be increased. The government has announced its intention to charge a resource tax based on revenue, and is piloting to levy environmental and sustainability fee in Shanxi province. The scheme is yet to be fully implemented nationwide.

4.25 Consumption tax: China has not used the consumption tax as a main tool to affect consumers’ choices on energy products. Over the past two years, the main changes in the consumption tax relating to energy products include: (i) an increase in the consumption tax rates for larger vehicles, which depend on the size of engines with tax rates ranging from 3 to 20 percent; (ii) the introduction of a consumption tax on some oil products like naphtha, lubricant and aviation kerosene, although it only ranges between 0.1-0.2 RMB/liter.

4.26 Energy and carbon tax: The rapid increase in energy production and consumption and the primary reliance on coal have contributed to China’s severe air pollution. In particular, the combustion of bituminous coal is causing serious air pollution from air-borne particulates such as sulfur dioxide (SO2) and carbon dioxide (CO2). Currently, China’s emissions of SO2 and CO2 are respectively the highest and second highest in the world. Many OECD countries have started to charge energy and/or carbon tax to pass the environmental costs to energy users. While China is starting to look at these options, it does not consider they could be implemented in the near term.

4.27 Import and export tax: In order to adjust the industrial structure and reduce the demand for energy, a number of initiatives were taken to discourage the export, and encourage the import to some extent, of energy intensive products and materials. During the past two years, export and import taxes were revised several times to: (i) eliminate/lower tax rebate rates for energy intensive products; (ii) levy punitive taxes on the export of some of the most energy intensive products; and (iii) reduce the import tax and duties for some energy intensive materials.

4.28 During the past two years, the VAT rebate rate for export of steel products was adjusted four times.19 The VAT rebate for export was eliminated for 553 items of energy and/or resource intensive products, and an export tax was levied on 142 items of most energy/resource intensive products like steel and coke. Tax changes for some selected products are shown in Table 4.2.

19 The main relevant document is the “Notice about the Lowering of the Tax Rebate on Some Commodities” jointly issued by MOF and the State Tax Bureau on June 18, 2007 and effective as of July 1, 2007.

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Key Results Achieved So far

(i) Overall Results

4.29 Based on government statistics, some decline in energy intensity has been achieved during the past two years, albeit less than targeted. In 2006, energy consumption increased by 9.3 percent and the energy intensity dropped by 1.3 percent. In 2007, energy consumption increased by 7.8 percent and the energy intensity dropped by 3.3 percent. Although the reduction in energy intensity is far less than the annual average of 4.4 percent needed to achieve the 20 percent reduction target, energy intensity reversed an upward trend experienced since 2002. Another good sign is that the pace of energy intensity reduction seems to be increasing as the impact of policies and measures gradually show up (Table 4.3).

Table 4.2 Tax Rate Change for Selected Products (in percent)

Items End of 2005 End of 2007

VAT rebate

Export tax

Import tax

VAT rebate

Export tax

Import tax

Some Steel products 13 0Coke 5 5 0Iron Alloy 13 0 0 10Cement 13 0Paper products 13 5Flat Glass 13 5Aluminum 5 5 15 0

Source: China Energy Net.

Table 4.3 Quarterly Energy Intensity Rate in 2006 and 2007

Quarter Q1&2(%) Year/2006(%) Q1 (%) Q2(%) Year/2007(%)

Reduction Rate -0.8 1.33 1.54 2.78 3.27Source: China Energy Net.

(ii) Change in Economic Structure

4.30 During the first two and a half years of the 11th 5YP, growth continued to be led by industry (Chapter 1). Thus, the economic structure shifted further towards industry, with the share of the less energy intensive tertiary sector not increasing, contrary to the government’s objective (Chapter 1 and 3). According to our estimates, other things equal, this change in economic structure increased China’s energy intensity by about 1.5 percent.

(iii) Change in Industry Structure

4.31 Within the industrial sector, several structural changes occurred with no obvious net impact. Output of large enterprises grew faster than that of smaller

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enterprises. As large enterprises tend to be more energy efficient, this development tended to reduce the energy intensity. While industrial value added increased on average 13 percent during 2006 and 2007, value added of large enterprises increased by 17.5 percent. On the other hand, heavy industry value added increased an average of 3 ½ percentage point faster than light industry. This trend increases the energy intensity as heavy industry is more energy intensive than light industry.

4.32 Table 4.4 shows the growth of some energy intensive industries during 2006-07 compared with the average growth rates between 2000 and 2005. There is no clear sign that the growth rates of the most energy intensive sectors have slowed down. The government has so far failed to curb the very fast expansion of the key energy intensive sectors.20

Table 4.4 Growth of Key Energy Intensive Products

Name Production Mt (2005)

Growth (%)(2000-2005)

Production Mt (2010 Planned)

Production Mt (2007)

Growth (%) (2006)

Growth (%) (2007)

Steel 397 24.7 414 567 25.3 21.3 Nonferrous 16.3 15.5 23.5 17.2 22.7 Cement 1064 13.0 1305 1360 15.5 9.9 Main Chemicals

140.8 11.9 158.7 13.5 11.4

Paper and paper board

56 12.9 77.9 16 18

Flat glass 420.3 18.0 497.5 12.5 13 Source: China Energy Net

4.33 Although the production and consumption of key energy intensive products continued to increase rapidly, the increase in export of some of these products slowed somewhat in 2007 and early 2008. In particular, exports of cement slowed (Table 4.5). This may in part be a result of the government’s policy to reduce VAT rebate rates for exports and to levy export taxes on the export of some key products.

Table 4.5 Change in (Net) Export of Key Products(millions tons, unless otherwise indicated)

2004 2005 2006 2007Iron and Steel -15.0 -5.6 24.5 45.8Cement 7.0 22.2 36.1 33.0Coke 15.0 12.7 14.5 15.3Iron Alloy -1.8 -1.4 -1.7 -2.0Flat Glass (mln m2) 144.5 199.3 264.3 309.2Selected Chemicals -18.5 -21.1 -18.3 -17.3Paper and Paper Pulp -24.7 -28.2 -28.8 -31.4Source: China Energy Net.4.34 There has been progress in closing down inefficient and polluting production

20 As detailed data are not available yet, it is not possible to derive the numerical figure of the contribution to energy intensity due to inter-sector structural change.

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capacity. As end of 2007, all the four key sectors with data available closed more inefficient capacities than originally planned, some by large margins (Table 4.6). This closure and their substitution by new, large, more efficient production capacities contributes to reducing energy consumption as well as to upgrading of the production structure.

Table 4.6 Closing Down of Inefficient Production Capacity

Sector Unit During the 11th FY Plan Period

2007Planned

2007Actual

Power 1000 KW 50,000 10,000 21,570Iron 1000 t 100,000 30,000 46,590Steel 1000 t 55,000 35,000 37,470Aluminum Electrolysis

1000 t 650 100

Iron Alloy 1000 t 4,000 1,200Calcium Carbide Stone

1000 t 2,000 500 570

Coke 1000 t 80,000 10,000Cement 1000 t 250,000 50,000 87,000Glass 1000 weight

cases30,000 6,000

Paper making 1000 t 6,500 2,300 4,000Liquor 1000 t 1,600 400MSG (Monosodium Glutamate)

1000 t 200 50

Citric acids 1000 t 80 20 Source: China Energy Net

(iv) Change in Energy Mix

4.35 During the last two years, with total energy consumption growing at 8 ½ percent per year on average, the share of renewable energy actually fell, contrary to the government’s objectives. Despite the tremendous progress made in scaling up the development of other renewable, particularly wind energy, the overall share of renewable energy in the mix declined slightly as the hydro share declined. Contrary to the government target, coal’s share in the energy mix edged up by about half a percentage point (Table 4.7). Such a minor change could not have had any measurable impact on the overall energy intensity of the economy, but if accounted for, would only have contributed to the increase in energy intensity.

4.36 Good progress seems to have been made in improving the energy efficiency per unit of products in the key industrial sectors. (Table 4.8) compares the actual average energy consumption per unit product in 2007 with the planned targets for 2010. Again data are available for only a few sectors, but they do indicate the substantial progress made. For example, coal consumption per unit electricity supplied dropped by 13 grams (3.5 percent) to 357 gce/kwh, close to the 2010 target of 355 gce/kwh.

Table 4.7 Primary Energy Consumption (Mtce)

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2005 2005 (%)

2010Planned

2010 (%)

2006 -2010

2006 Actual 2007 Actual

Coal 1556 69 1784.7 66.1 1705 (69.4 %) 1840 (69.5 %)Oil 466 21 553.5 20.5 499 530.5Hydro 139 6.2 183.6 6.8 146Gas 65 2.9 143.1 5.3 80.3 96.3Nuclear 18 0.8 24.3 0.9 19.5Other Renewable

3 0.1 10.8 0.4

Total 2247 100 2700 100 4% 2456 (9.3 %) 2648 (7.8 %)Source: China Energy Net.

Table 4. 8 Efficiency Improvement of Key Products

2005 2006 2007

Domestic Average

Domestic Average

Domestic Average

Steel Production (kgce/t) 694 640 632 (-8.9%)

Cement Production (kgce/t) 127 120 115 (-9.4%)

Copper Refinery (tce/t) 733 595 361 (-51%)

Allumium Production (kgce/t) 998 803( ?) 863 (-13.5%)

Ethylene Production (kgce/t) -1.1 % (2007)

Glass Production (kgce/b) 19 19 17 (-10.5 %)

Ammonia Production (kgce/t) -4.1% (2007)

Coal-fired Power Plant (gce/kwh) 370 366 357 (-3.5%)Source: China Energy net.

(v) Change in Energy Efficiency of Key Products and Sectors

4.37 Progress has been made in reducing the energy intensity of specific industries, particularly the key energy intensive industries. Table 4.9 provides examples of a few key industries. The energy intensity of sectors like iron and steel, construction materials reduced by more than 10 percent in 2007 alone. The reduction in energy intensity results from: (i) better energy efficiency and lower energy consumption per unit of products produced; and (ii) upgrading in the mix of products towards more high quality and high value-added products.

Table 4.9 Energy Intensity Reduction (EIR) of Key Industries in 2007

Industries Iron and Steel

Construction Materials

Non-ferrous Coal Petro Chemicals

EIR ( %) 10.1 10.7 7.2 4.8 2.9Source: China Energy Net.

Conclusions and Lessons

4.38 In the first two years of the 11th 5YP, the reduction in energy intensity fell short of the target. Nevertheless, steady progress has been achieved, especially considering

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that (i) the energy intensity reversed an upward trend exhibited since 2002; (ii) the government’s target was formalized in mid-2006, and assigned to the provincial governments in late 2006; (iii) most of the policy measures and incentives were implemented in the second half of 2006 and 2007 and need time to be effective; (iv) new policy measures and incentives are still being developed and implemented; (v) the structure of the economy shifted more towards industry.

4.39 So far, the reduction in energy intensity seems to come mainly from improvements in energy efficiency at the sectoral and product level by achieving higher efficiency in specific products in key energy intensive industries. Less progress has been made in increasing the share of higher value-added goods in specific product lines. In addition, no progress has been made so far on the macro level, as the economic structure shifted further towards dominance of the industrial sector, and, within the industrial sector, the energy intensive heavy and chemical industry gained further dominance. The lack of rebalancing the overall economy offsets in part the gains at the micro level. The efficiency improvements gained through mandated efficiency standards and closure of inefficient capacities would become harder to tap in the future. Without making more fundamental changes in the economic and industrial structure, it is unlikely that the 11th 5YP’s 20 percent reduction target in energy intensity could be achieved. Indeed, even the 3.3 percent annual gain of 2007 will be difficult to sustain once the easy gains through technical rehabilitation and closure of inefficient capacities are completed

4.40 International experience has shown that reforming energy pricing and taxation is one of the most powerful means to promote energy efficiency and saving through technological progress and behavioral change. However, this tool remains largely unutilized thus far in China. Notably, market based instruments such as consumption tax, production tax and environmental tax incentives are yet to be developed and expanded.

4.41 Instead, the government has overwhelmingly relied on administrative tools. In view of the existence of a strong and extensive institutional system, particularly at the provincial level, most of the administrative tools have been quite effective and produced quick results. These are particularly useful when they are applied to large-state owned enterprises, where the performance of senior executives is evaluated by the government. But they are much less effective with the non state-owned enterprises and ordinary consumers. So the choice of administrative tools should be based on the available institutional capacity and should be supplemented by appropriate incentives.

4.42 The government has increased its financial support to energy efficiency improvements recently through fiscal budget and state bonds. But the amount of support provided is still small in comparison to the large financial needs. Moreover, the energy efficiency fund is planned on an annual basis and is not known to potential applicants until very late, making it difficult for the industries and companies to plan ahead. There are no clear criteria and procedures on how the fund is allocated. The fund is not managed by a professional body, but by government officials who may not have enough

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knowledge of the energy efficiency business. The fund is also only accessible to a limited number of large state-owned enterprises. The vast majority of medium/small enterprises which have larger energy saving potential still face tremendous difficulties in accessing to both government funds and state-owned banks’ financial services.

Recommendations

4.43 It is very important for China to make its best efforts to achieve the 20 percent energy intensity reduction as committed under the 11th Five-Year-Plan periods. To do so, it is also important to develop the technical, institutional, regulatory, and financial framework and capacity to sustain China’s efforts to transform to an energy efficient economic growth pattern. In order to further tap the vast energy efficiency potential over the longer term, it is recommended to:

Gradually augment administrative tools with regulatory means and market incentives through environmental emission standards, consumer products labeling, and fuel and building efficiency standards. With car ownership expanding rapidly and China continuing to urbanize rapidly in the coming decades, energy efficiency and building standards can play a major role in containing energy demand. When administrative means are applied, careful cost and benefit analysis should be conducted to ensure the potential benefits outweigh the costs;

Accelerate energy price reform so that prices reflect the full costs of supply, including the scarcity value of energy resources and the costs of environmental externalities; impose energy or environmental taxes when the costs of environmental damage can not be internalized. Rational energy pricing not only induces behavioral changes among industries and consumers to reduce energy wastage, but also promotes innovation and technological change over the medium to long term;

Develop a comprehensive set of fiscal and taxation policies to promote the development and dissemination of energy efficient products, and encourage innovation;

Increase the effectiveness and efficiency of the energy efficiency fund/credits. These funds/credits should be accessible to all stakeholders, private or public. The funds should be managed by a professional agency with clear and transparent criteria and procedures for allocation, and with a clear framework and indicators for monitoring and evaluating its effectiveness;

Build the institutional and regulatory capacity at both the central and provincial level to collect and analyze energy consumption data, to develop sector/industry specific energy efficiency targets and implementation plan; to monitor, verify, and benchmark energy efficiency data, and to evaluate

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and assess the impact of energy efficiency policies and measures and recommend further actions and changes; and

Develop the energy efficiency services sector to provide information to energy users on the availability of new technologies and means to improve efficiency, to assist in analyzing the costs and benefits of energy efficiency investments. More information and services in the energy efficiency sector could help reduce the energy users’ perceived investment risks.

4.44 In addition, much more needs to be done to fundamentally change the growth pattern of China’s economy along the lines discussed in Chapters 1 and 2 if China is going to move to a resource efficient and environmentally friendly society. Much greater efforts are needed to rebalance growth from its current industry and capital intensive pattern to one that is more services and labor intensive.

4.45 Over the long term, China’s energy demand will be determined by: (i) peoples’ lifestyle, including the desire to own and drive cars and the desire to own small or large houses; (ii) energy efficiency in energy production, transformation and consumption in all sectors of the economy; and (iii) the demand for materials such as steel, cement, glass as well as consumer products, which are in turn determined not only by the size of the infrastructure facilities and buildings at any particular time, but also by the economic life of these facilities. The third factor is currently not discussed much but it is increasingly become important in determining whether China can be a resource efficient society. As the economic life of the infrastructure facilities such as roads and bridges, and housing buildings is relatively short, China uses a larger accumulated amount of inputs as roads need to be reconstructed and housing needs to be rebuilt. A typical example is cement consumption which can not be recycled. China’s per capita accumulated cement consumption has already exceeded that of the UK while China is still in an early stage of industrialization and development compared with the UK. This is in part because of the relative short life span of housing and infrastructure facilities in China. This calls for an increase in the quality and thus the economic life of infrastructure facilities and other products

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5. Coordinating Urban and Rural Development

Background and Key Objectives

5.1 Prior to the 11th 5YP, China’s rapid growth was accompanied by rising rural-urban disparity. Impressive income growth and poverty reduction on the country side lagged the even more impressive economic growth observed in urban areas. Thus, the ratio of urban to rural income increased from 2.2 in 1990 to 3.2 in 2005, much higher than in many other parts of the world and the highest in East Asia. Moreover, public service delivery in rural areas lagged behind substantially, accentuating the disparities in living standards and social indicators. Addressing this imbalance in rural and urban development has become a major objective of the 11th 5YP.

5.2 The overall objectives of the 11th 5YP in this area are

Building the new socialist country side; Increasing urbanization; Preventing an increase in urban-rural inequality in incomes, living

standards, and public services.

5.3 The 5YP and ensuing policies envisage a dual approach to achieve the objective of balanced rural and urban development. Through “sound urbanization” the 11th 5YP seeks to accelerate the absorption of rural labor in the urban labor markets. And through the construction of a “new socialist countryside” it seeks to increase rural living standards directly. In pursuing this dual strategy, the 11 th 5YP is further guided by the concept of “scientific development”, implying increased attention to the efficiency of input and resource use as opposed to increasing inputs.As detailed in Annex 4, building up the new socialist country side is one of 15 “main tasks and strategic priorities” of the 5YP, calling on China to:

Develop modern agriculture, by achieving higher productivity, agricultural structural adjustment, enhancing agricultural service systems, and improve markets;

Increase farmers’ income; by raising agricultural and non-agricultural income and increasing net fiscal support;

Improve rural conditions; by having more infrastructure, rural environment protection, rural health service, and rural social security;

Train new farmers; via education, skill training, and culture; Increase agricultural and rural investment; and Deepen rural reform.

5.4 This approach is consistent with China’s existing approach of addressing the three rural issues (San Nong Wenti 三农)—agriculture, farmers and the countryside.

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In agriculture this includes achieving national food security through at least 95 percent self-sufficiency in grains, including through land consolidation and large-scale (industrial) farming, and diversification towards higher value crops. Farmers’ incomes are directly supported following the “take less, give more” and “improved policies” principles.21 Rural non-agricultural income is being fostered through programs promoting rural non-farm employment and rural-urban migration. Measures to reduce the costs of accessing social services (education, health, and safety nets) have been introduced in rural areas to narrow the gap in human development. To improve rural living conditions, investment in rural infrastructure (sanitation, electricity) has been expanded, regulations and policies on rural-urban competition over resources such as water and land are under review, and institutional reforms to improve governance are being deepened.

5.5 To track progress towards achieving the overarching the overall objectives, the 11th 5YP idenfified some anticipative and obligatory indicators and targets (Table 5.1)

Table 5.1 11th 5-Year Program Target Indicators for the Balanced Rural-Urban Development

Goals Indicator Type of indicator

Baseline (2005)

Target (2010)

Promoting urbanizationUrbanization rate Anticipativ

e43% 47%

Number of rural labor transferred in 5 years (1,000)

Anticipative

45,000

Number of new urban jobs in 5 years (1,000) Anticipative

45,000

Constructing the new socialist country sideAgriculture Farmland retention (million ha) Obligatory 122 120Farmers Annual net income/capita of rural residents

(RMB)Anticipativ

e3,255 4,150

Annual disposable income/capita of urban resident (RMB)

Anticipative

10,493 13,390

Rural countryside

Coverage of new rural cooperative medical services (%).

Obligatory 23.5 80

Source: 11th 5-Year Plan

5.6 The evaluation of progress towards achieving the overall objective of more balanced rural and urban development during the first half of the 11 th 5YP (2006-2007) focuses on the evolution of the new socialist countryside and other rural aspects, while the nature of the urbanization process will be only discussed insofar it affects the balance of rural-urban development. Section II discusses the key measures taken and section III address results achieved, including towards the quantitative indicators of the 5YP. Section IV distills emerging themes and recommendations. To

21 The guideline to “take less” calls for rural tax and fee reform; the one to “give more” includes free compulsory education, better medical care social security, and higher agricultural subsidies; and that on “improved policies” relates to items including agricultural information, farmers’ associations, rural credit cooperative reform, rural labor migration.

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do so, the chapter draws on a series of interviews with informed stakeholders (central, provincial and local government officials, farmers, think -tanks and academics), analytical studies and background reports drawing on recent information, and World Bank staff experience from the field.22

Measures Taken and Key Results

Measures Taken

5.7 While it is difficult to delineate the different areas of policy action precisely, several types of measures can be distinguished: (i) government spending; (ii) measures and policies to support the diversification and modernization of agriculture; (iii) changes in land policy; (iv) rural subsidy and transfer programs; (v) policies to improve (living) conditions in rural areas; and (vi) reforms in public administration to improve rural public service delivery.

(i) Government Spending to Boost Agriculture

5.8 Central government spending on agriculture and rural areas increased significantly, although it remained broadly constant as a share of total spending (Table 5. 2). At a March 2008 State Council meeting, the importance of agriculture was again emphasized with an additional RMB 25 billion granted to the rural sector on top of the 2008 budgeted amount, largely in the form of increased subsidies/transfers. Ten measures were launched specifically for agriculture.23 With central government spending in the rural areas having increased substantially in absolute terms during the 11th 5-Year Plan, there is room and need for focusing on the efficiency of spending.

Table 5.2 Budgeted Central Government Spending on Agriculture and Rural Areas

 RMB billion Year 2005 Year 2006 Year 2007 Planned for Year 2008

Total central government spending 3,390 4,042 4,957 6,079

Central government spending on agriculture and rural areas

297.5 339.7 431.8 562.6

Government spending in rural areas as a share of total government spending (%)

9 8 9 9

Source: National Bureau of Statistics of China5.9 Spending on government programs to stimulate agriculture also increased, 22 In addition, to get a sense of specific experiences with the 11 5-Year Plan on the ground, a field trip was undertaken by the team to Jishui County in Jiangxi Province in February 2008.23 They are: (1) increase agricultural subsidies by RMB 16 billion; (2) increase grain subsidies by RMB 5 billion; (3) increase minimum procurement price for grains; (4) increase government investment in water conservancy and agricultural infrastructure by RMB 4 billion; (5) increase spending on livestock disease prevention by RMB 650 million; (6) utilize the RMB 4.6 billion agricultural awards to provinces for interest and insurance subsidies; (7) waive highway tariffs for vehicles transporting fresh produce; (8) strengthen control in agriculture related markets; (9) strengthen financial services in the rural areas; and (10) strengthen policy implementation.

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with a focus on strengthening a series of existing programs in land and water management, agricultural science and technology and extension, and marketing (Table 5.3). After several years of decline of central government spending on agriculture, such spending rose significantly in 2007, bringing it close to 2003 levels in nominal terms, although this means still significantly lower spending in real terms or as a share of GDP (Table 5.4).

Table 5.3 Government Programs Supporting Agricultural Production

Policy group Specific policy/program 2000-2005

2006 2007

1. Agricultural production 1 Support to major grain producing areas √ √ √2 Basic farmland protection √ √√ √√3 Irrigation and water resource management √ √√ √√4 Seed improvement √ √ √5 Plant protection √ √ √6 Soil fertility improvement √ √ √

2. Agricultural structural adjustment; market development support, etc.

1 Agricultural information2 Agricultural product market system

√√

√√√√

√√√√

3 Rural market system development √ √√4 Animal disease prevention √ √√ √√5 Key animal epidemic control √

3. Agricultural science and technology and technical extension

1 S&T service system development for agro-enterprises2 Sparkle prosperity S&T project

√√

×√

×√

3 S&T to improve competitiveness agriculture √ √ √4 S&T for agricultural machinery grain industry

√ √ √

5 Extension of agric. S&T information service √ √ √6 Agricultural S&T outreaching households √ √ √7 S&T for new socialist countryside √ √8 Agricultural S&T extension system reform √ √9 Agricultural S&T upgrading action √ √

4. Rural land management 1 Enforced management of rural collective land

√ √√ √√

2 Land use circulation √ √√ √√ √ = start of program, √√ = deepening of program Source: 11th 5-Year Plan

5.10 To bolster grain production, higher government spending on agriculture has been accompanied by an increase in support to farmers through area based income transfers. Since the abolishment of all agricultural taxes and levies, fiscal support to agricultural production has become one of the most important channels used to increase support to farmers, and there has been as shift from net taxation to net subsidization of agriculture. Support to grain production has increased five-fold since 2004, reaching a budgeted RMB 74 billion in 2008 (Table 5.5). The largest initiative, “direct subsidies to agricultural inputs” (almost RMB 50 billion in 2008), seeks to compensate farmers for rising energy and fertilizer costs. Farmers receive a subsidy from the central government based on the amount of arable land, similar to rule on the “direct grain subsidies” which have replaced the former grain price support system.

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As the grain support is allocated on the basis of the amount of arable land as opposed to land cultivated with a particular commodity, these subsidy policies have been more effective in boosting farmers’ incomes than in bolstering grain production, even though the area sown with improved varieties has expanded and mechanized land preparation, sowing and harvesting has increased in the first half of the 11th 5YP.

Table 5.4 Central Government Spending on Agriculture

 RMB billion 2003 2004 2005 2006 2007Water conservancy and meteorology 1 19.3 19 10.6 10.6 18.1Comprehensive agricultural development 2

3.4 3.6 2.5 3.55 5

Agricultural science and technology 3 1.2 1.6 1.9 2.1  Total 23.9 24.2 15.0 16.25 23.1Annual change (%)   1.3 -38.0 8.3 42.2Source: China’s authorities.

1) Water conservancy and meteorology includes only spending by the NDRC, the largest source of funding. A disaggregation of programs included can be found in Annex 6. 2) This includes spending on animal and plant disease monitoring of RMB 1.2 billion per year for many years.3) This includes only three items for centrally funded agricultural science and technology activities (fees for testing new products, fees for middle stage testing and support to important science and technology projects).

Table 5.5 Agricultural Subsidies

RMB billion 2004 2005 2006 2007 2008 budgetedDirect grain subsidies 11.6 13.2 14.2 15.1 15.1

Subsidy to improved crop varieties

2.9 3.9 4.1 5.6 7.1

Subsidy to procurement of agricultural machinery

0.1 0.3 0.6 2.0 4.0

Direct subsidies for agricultural inputs

    12.0 27.6 48.2

Total 14.5 17.4 30.9 50.3 74.4

Increase (percent)   19.63 77.7 62.8 47.9Source: China’s authorities.

(ii) Measures Towards the Diversification and Modernization of Agriculture

5.11 During the 11th FYP the emphasis in this area has been on strengthening existing support programs for livestock production, animal health disease prevention, and expansion of producer cooperatives (Table 5.6). Regional development around high value products is also pursued through dragonhead enterprises and promotion of farmers’ cooperatives. Funding for these programs has been constant around RMB 3-5 billion per year.

Table 5.6 Programs Supporting Agricultural Modernization

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Policy group Specific policy 2000-2005 2006 20071. Agricultural industrial structure adjustment

1 Enhancing of safety and quality of farm produce2 Construction of farm produce industrial base

√√

√√

√√

3 Farm produce processing √ √√ √√4 Project of “shifting mulberry from the east the

west” √ √

2. Livestock and poultry disease prevention policy

1 Animal disease prevention system development 2 Important animal epidemic control action for bird flu

√ √√ √√√

4. Agricultural subsidy policy 1 Subsidy to improved dairy cow 2 Subsidy to production sow

√ √√ √√√√

5. Specialized farmers’ cooperatives

√ √√ √√

6. Ag. industrialization and dragonhead enterprises

√ √ √

Source: 11th 5YP. √ = start of program, √√ = deepening of program

5.12 In terms of food safety, progress has been made in segments targeting export markets, though substantial work remains ahead. Investments have been made by local government levels and the private sector in modern processing, transportation and distribution infrastructure. Related testing and product control has improved as information is reaching export producers on international standards and regulations. At the same time, many technical standards and regulations related to food safety in China are outdated, duplicative, or inconsistent with international standards. Coordination among the ten Government entities responsible for food safety neither at the central government level horizontally, and at the local government levels, vertically – is weak. As a result, different levels of government sometimes develop their own standards. Responsibilities are unclear and the relevant institutions often lack the technical and institutional capacity to monitor and enforce compliance. Furthermore, as witnessed during the recent milk products scandal, monitoring and enforcement of the existing standards is weak and the rule to exempt certain enterprises from tests creates the wrong incentives.

5.13 The Law on Farmer Professional Cooperatives (Farmers’ Associations) was an important step to promote “industrialization” of high value agricultural products. With the passing of this Law, in end 2006, for the first time Farmers’ Associations were clearly defined and were given clear registration procedures, enabling them to operate and collaborate efficiently with other organizations. Key challenges looking ahead include the promotion of wider familiarity with the law as well as the effective creation of bottom-up groups at the grassroots levels.

5.14 In addition, to support agricultural “industrialization,” significant central and local government support is going to “Dragon Head Enterprises” trying to facilitate integration of the agricultural product supply chain.24 So far, about 500 key Dragon Head Enterprises have been nominated at the national level and over 2,000 at the

24 A dragon head enterprise is a government subsidized leading, large enterprise that is meant to support the integration of the supply chain with other smaller enterprises, the farmers, and buyers.

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provincial levels.25 Government support is given in the form of direct project funding by various line ministries and bureaus, interest rate subsidies, and tax breaks. In the absence of appropriate evaluation criteria and evaluation mechanism it is difficult to make a clear judgment of the impact of the support to these enterprises. However, the successes of the Dragonhead enterprises initiative has been mixed. A shortcoming, especially at the provincial levels, is lack of objective qualification or selection criterion for an enterprise to become a “Dragonhead Enterprises” and thus the recipient of significant amounts of government grant support.

5.15 Access to finance has improved but remains challenging. The Government has introduced a number of reforms that have increased access to finance in rural areas, including introducing a policy to reduce market-entry thresholds for banking institutions in the rural areas, partial interest rate liberalization, corporatization of the rural credit cooperatives, and pilots with agricultural insurance. In addition, a number of pilots are ongoing testing micro finance schemes and community development funds – results of which remains to be seen. However, significant difficulties remain for farmers to obtain adequate financial services, including medium and long term investment financing, and proper agricultural insurance. The first rural finance report by the PBOC issued in September 2008 includes useful concrete suggestion to improve access to rural finance, including on simplifying procedures and providing more cost effective products. In addition, the efforts to bring in specialized private sector enterprises, including foreign ones, are welcome.

(iii) Adjustment in Land Policy

5.16 As emphasized in the No. 1 Central Document 2008, land tenure security is key for the government to achieve its San Nong Wenti objectives. Land tenure security fosters land rental markets that facilitate labor migration, increase agricultural productivity and enhance incomes of both renters and land right owners.26

As urbanization in China progresses, rural-urban competition over land on the urban fringe has intensified and land acquisition from farmers by local governments has caused a lot of complaints and even protests by farmers. The debate has centered on the issue of security of land tenure rights and the distribution of the rents derived from the conversion of farm land into alternative uses.27

5.17 The existing laws are clear in stipulating compensation and requisition procedures and farmers’ rights over agricultural land have been strengthened,

25 Dong Fengxia, Jensen H. Helen, 2007.26 Based on a national sample of land renters and tenure holders, World Bank research found that, of the people that rented out land after that became allowed, 60 percent had relied on agriculture as their main source of income prior to the change, whereas only 17 percent continued to do so afterwards. 55 percent migrated (up from 20 percent) and 29 percent engaged in local non-farm activities (up from 23 percent). Net revenue on rented plots increased 60 percent, with two thirds of the gains going to the land renters and one third to the land tenure holders as rents. Net incomes for both renters and land tenure holders increased, respectively by 25 and 45 percent (partly due to migration income) (World Bank, 2007a).27 Land transfer fees, estimated to account for 30-50 percent of total sub-provincial government revenues, have traditionally been kept off-budget, which made their use non-transparent (World Bank 2007b). The central government called in 2007 for including them in local government budgets.

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inducing a more efficient allocation of land. The Property Law adopted in March 2007, recently reinforced by the 2008 No. 1 Central Document, further bolsters the legal robustness of farmers’ right over rural agricultural land. Nevertheless, farmers cannot yet use land tenure rights as collateral to obtain credit and have unclear and severely constricted rights over their land plots. Issuance of land certificates and land contracts is not yet completed.28 In addition, many of the issued contracts and certificates have limited legal validity.29

5.18 Moreover, implementation at the local level is highly variable with very mixed effects on farmers’ livelihoods and incomes. In practice, land readjustments still threaten farmers’ land tenure security, exacerbated by continuing ambiguities and legal loopholes. Recent surveys suggest that the compensation received is regularly considered unfair by the recipient, that the requisition process is often not transparent with information inaccessible and few mechanisms for meaningful participation or grievances in case of problems.

(iv) Rural Subsidy and Transfer Programs

5.19 During the 11th 5YP, agricultural taxes were abolished. This was a major breakthrough. Together with the abolishment of the two-labor contributions and other fees, that reform is estimated to have increased farmers’ incomes per capita by up to 10 percent on average. Agricultural incomes have been further supported by the various agricultural subsidy programs. While the total income effects of the different support programs remain hard to gauge, these different income support measures are mentioned by farmers time and time again as key in improving their livelihoods during World Bank field visits.

5.20 In order to achieve its urbanization target of 47 percent in 2010, the programs launched to promote rural surplus labor transfer have been deepened under the 11th

5YP (Table 5.7; see Annex 6 for more detail). Overall, RMB 2.6 billion was spent between 2000 and 2007 on these different programs with the emphasis shifting from merely transferring rural surplus labor to scaling up the transfer of better skilled laborers, including training of the laborers. Some of the programs also aim to improve the skills for agricultural laborers in support of agricultural modernization and rural off-farm employment in agro-processing. A rigorous evaluation of the effectiveness of these programs has not been completed so far.

Table 5.7 Labor Mobility Programs Are Strengthened

Policy group Specific policy 2000-2005

2006

2007

28 A 2005 survey found that 63 percent of households had been issued a contract, a certificate or both, mostly during the 1998-2000 period, with little issuance in recent years (Keliang, et al., 2006)29 World Bank (2007b).

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1. Labor transfer policy 2.1 Sunshine program of rural labor transfer training

√ √√ √√

2. Labor training policy 2.2 Green Certificate program √ √√ √√2.3 Trans-century youth farmer S&T training

√ √√ √√

2.4 Support to business startup of new type of farmers

√ √√ √√

2.5 Training for rural surplus labor for transfer employment

√ √√ √√

2.6 Agricultural distance education √ √ √2.7 One million vocational students program

√ √ √

2.8 Agricultural practical technology training

√ √ √

2.9 S&T training of new type of farmers √ √√Source: 11th 5YP.

5.21 In addition, to foster coordinated rural and urban development a series of integrated rural-urban planning pilots are being been initiated, including a large pilot in Chongqing and Guangdong. These pilots are all still largely in the planning phase, and it is too early to know the outcomes.

5.22 Poverty Reduction Programs have shifted emphasis. Since 2001, in order to improve targeting efficiency, rural poverty programs have shifted from the 592 nationally designated poor counties to 150,000 poor villages under the Integrated Village Development Program (IVDP). Emphasis has also shifted from the traditional multi-sectoral capital investment interventions to human capital formation and labor mobility and participatory village development planning. This shift was supplemented under the 11th 5 year plan by increased attention to commercialization of agriculture through the previously discussed Dragon Head Enterprises, and discussions on the need to raise the official poverty line, consistent with the overall increase in China’s living standards. Table 5.8 lists the various poverty reduction programs (See Annex 5 for more detail).

Table 5.8 Targeted Poverty Reduction Projects

Specific policy 2000-2005 2006 2007

1. Priority poverty reduction counties √ √ √2. Poverty reduction with village as a unit √ √√ √√3. “Dew” project √ √4. Poverty reduction through industrial development

√ √√ √√5. Training of poor youth labor for labor mobility employment

√6. Poverty standards √ *

Source: 11th 5YP. * Proposed in 2007 but yet to be implemented.

5.23 Overall budgetary funding for poverty reduction programs increased over the past couple of years, even as funding through treasury bonds and subsidized loans is decreasing. Funding for these programs comes from multiple sources with the MOF providing budgetary grants for public investments, training and resettlement; NDRC

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funding infrastructure projects through the “food for work” program; and subsidized loans to enterprises and households (previously through Agricultural Bank of China, now mainly through Rural Credit Cooperatives). The latter make up about 50 percent of the total spending on poor area development programs (see Table 5.9)

Table 5.9 Central Government Funding for Poverty Reduction

RMB BillionYear

Subsidized loans

NDRC “Food for work”

(of which T-bonds)

MOF Budgetary funds

“Food for work”*

+ budgetary fundsTotal

2001 18.5 6.0 (2.0) 5 9.0 29.52002 18.5 6.0 (2.0) 5.6 9.6 30.12003 18.5 6.5 (2.5) 6.4 10.4 31.42004 18.5 6.4 (2.4) 8.2 12.2 33.12005 7** 6.8 (2.8) 9 132006 6.9 4.6(0.6) 9.7 13.7 21.22007 12.4 4.5(0.5) 10.4 14.4 27.3Source: Report On China's National Economic And Social Development (2002-2008), NDRC* Excluding treasury-bonds. ** Through the first 3 quarters.

5.24 So far, about 50 percent of the 150,000 IVDP villages have benefited from the program. The targeting needs to be further improved because the poor are increasingly more heterogeneous and dispersed throughout villages of rural China, and the poverty is changing its nature (being poor because of personal characteristics—i.e., being disabled, uneducated)—as opposed to where people live. The introduction in 2004 of the rural minimum living standard allowance system (dibao) and its nationwide expansion in 2007 is an important step in addressing this issue together with the social insurance programs in the “five-guarantee provisions” for the rural areas.30

5.25 China’s government is now considering a proposal from the State Council Leading Group of Poverty Alleviation to increase the current national poverty line in line with the previous international poverty line of real purchasing power of US $1 dollar per day. This would for the first time align the Chinese poverty line with the international standard, and the number of people considered absolute poor people in China would be doubled to about 80 million, the bulk of them in rural areas.

(v) Policies to Improve (living) Conditions in Rural Areas (including quality of life)

5.26 The “third rural issue”— rural areas — has called for attention to living conditions and quality of life of the rural households. The central government’s support to rural infrastructure and services has increased substantially in recent years, bringing significant improvements. This is so even as significant regional and urban-rural disparities in access to public services remain, reflecting large income disparaties, further accentuated by fiscal disparities across localities under

30 Other important social insurance programs included in the five guarantee provision system are the rural cooperative medical insurance scheme and the minimum living standard allowance (dibao).

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decentralized finance.

5.27 The Government supported infrastructure investments have clearly improved the quality of life of the rural residents. Close to 50 percent rural households in China now have access to piped water, and only about 20 percent of rural households have problems with obtaining safe drinking water.31 In 2007, an additional 31 million rural people were provided safe drinking water. Rural roads construction has focused on access to townships and villages and an additional 120,000 km of rural roads were built or upgraded in 2007. The ongoing expansion of biogas to rural households is in particular beneficial to women. They save time from fuel-wood gathering for cooking, and benefit from the reduced indoor air pollution in the kitchens. The number of households with biogas was estimated at about 18 million at the end of 2005. During the 11th 5YP, the government intends to increase the number of rural households with biogas to 40 million. While a modest number compared with the overall number of rural households, this represents an estimated 30 percent of households that meet the technical criteria for being able to make use of biogas.32

5.28 Government funded programs in provision of cultural services have also increased. They include support for cultural centers (including libraries) and cultural activities (e.g. “one movie per month per village,” performances, sports activities, etc.) and campaigns that aim to improve the “quality” of the farmers in terms of living habits and behavior. Radio coverage now reaches over 95 percent and television coverage over 96 percent of the country’s population.

5.29 The 11th 5YP continued with the direct investment programs from the 10th 5-Year Plan focusing on: (i) subsidies for afforestation and terracing for ecological purposes (returning cultivated slope land above 25 degrees to trees or grassland; (ii) provision of safe drinking water; (iii) construction of rural roads; (iv) extending electricity to villages; and (v) subsidies for biogas digesters to households for cooking purposes, etc. (See Annex 5 for a compilation of the major NDRC investment programs in the rural areas). While investments in improving rural living conditions rose only modestly during 2006-07, they were nonetheless effective in improving the quality of rural people’s life as demonstrated above (Table 5.10).

5.30 The government is pursuing administrative reform to support improvements in the quality of public services in rural areas. While budgetary allocations determine the quantity of public services provided to the rural areas, the efficiency of the various government offices at the local levels determine the quality of those services. A number of initiatives are under way trying to improve the quality and/or efficiency. Administrative reforms have taken place to reduce the number of public servants in the countryside. The number of villages and townships has been reduced. Lower level administration has been streamlined by putting townships under county administration. The introduction of the single treasury account system for flow of

31 According World Health Organization statistics, about 80 percent of China’s rural population have access to safe drinking water compared with 67 percent of other rural regions in East Asia. 32 About 0.7 percent of China’s rural households utilize biogas as the main cooking fuel.

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funds has been a major improvement in the efficiency and transparency of funds transfers to the rural areas. Pilots are ongoing on participatory village level budgeting as well as integration of public funds.

Table 5.10 NDRC Investments in Rural Infrastructure

RMB Billion 2003 2004 2005 2006 2007

Forest and Ecological Protection 91 70 101 59 77

Improving Production and Living Conditions in Rural Areas

184 176 149 204 219

Provision of safe drinking water 28 18 20 60 64

Rural road construction and electrification 66 72 51 62 73

Subsidies to household based biogas development

10 10 10 25 25

Integrated poverty reduction activities 80 76 68 57 57

Source: Data compiled from unpublished NDRC departmental sources.

(vi) Reforms in public administration

5.31 In addition, a number of governance related reforms have been introduced to improve transparency of government institutions, the most recent one being the “Rules on Openness of Government Information ”stipulating that all administrative public organizations have to make certain categories of information available to the public in an accessible manner. 33

5.32 A key remaining issue is low institutional and human resource capacity, especially in the more remote areas. In addition, the increase in central government funding is putting tremendous stress on local capacity to implement the various programs adequately. This is exacerbated by lack of accountability and lack of institutional incentives for effective use of resources.

Results

5.33 This section assesses the results of the measures taken so far in meeting the quantitative indicators, with a focus on agricultural production, rural incomes, and rural-urban inequality. 5.34 Main Achievements. Based on our assessment, it seems that the hard targets relevant to coordinating rural-urban development in the 11th 5-Year Plan are likely to be met. The main achievements per each target indicator under the 11 th 5YP are summarized in Table 5.11.

33 Passed by the 165th standing meeting of the State Council and coming to effect on May 1, 2008, which called for improvement of availability of (1) information which concerns the vital interest of citizens, legal persons and other organizations; (2) information that needs to be know by the public; (3) information regarding the functions and procedures of a public entity; and (4) other information required by law to be made public.

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Table 5.11 Achievements as of 2007 of the Major Relevant Target Indicators

Indicator Baseline (2005) Target (2010) Current Achievement

Per capita rural net income (RMB) 3,255 4,150 4,140 (2007)Urbanization rate (%) 43 47 44.9 (end 2006)

Farmland retention (mln ha) 122 120 121.7 (end 2006)Coverage of new rural cooperative medical services (%)

23.5 > 80 87.5 (2007)

Transfer of rural laborers – rural migrant workers (mln people)

131 (end 2006)

Source: China’s authorities.

Agricultural Production

5.35 A key objective of the 11th 5YP is to enable a stable and sufficient supply of grains ensuring 95 percent internal food self sufficiency. This translates into a target of 500 million tons grain output by 2010 and a target to retain no less than 120 million hectare as farmland. National cereal output is now back at the levels reached during the late 1990s (Figure 5.1) and the overall target of 500 million ton grains set for 2010 has already been achieved.34 At the end of 2006, 121.7 million ha of arable land was available.

5.36 Grain output targets were reached through grain area expansion and, to a lesser extent, through increased yields. The cereal land area expanded by 4.8 percent per year between 2004 and 2007, while yields grew 2.7 percent per year. Since 2004, yield improvement has decelerated again, turning negative in 2007 (Figure 5.2). Given strong competition over arable land from urbanization, industrialization and the rush to develop economic zones, the scope for land expansion is limited and further grain output expansion will have to come from increases in yields. Moreover, the quality of reclaimed land is often of inferior quality, further underscoring the need for a focus on increasing yields to secure the food supply.

5.37 The structure of the agricultural sector appears to have changed little. Little change is observed in the share of higher value outputs in overall agricultural GDP (Figure 5.3). There is a slight decline in the share of crops (grains, oils, cotton, sugar crops, fruit, vegetables) and a slight increase in the share of animal husbandry, with fishing and forestry largely constant. The 2007 increase in animal husbandry largely followed the 31 percent jump in livestock product prices which more than compensated for the 16 percent decline in livestock product production following the large increase in pork prices.

Figure 5.1 Grain Production has risen to levels of the late 1990s with a slowdown since 2004

Figure 5.2 Changes in cereal Land Allocation have dominated the decline (before 2004) and the increase (after 2004) in cereal production

34 Grains include cereals (85 and 90 percent of total grain production), beans and tubers.

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300320340360380400420440460480500

1990 1992 1994 1996 1998 2000 2002 2004 2006

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Increase in rural income and prevent an increase in rural-urban inequality

5.38 Rural per capita income is already reaching the 2010 target. The 11th 5YP has set itself two explicit income related targets to assess the evolution of living standards in rural and urban areas. Per capita rural income growth accelerated to 9.5 percent in 2007 in real term, reaching RMB 4,140 in nominal terms, only a whisk away from the anticipated 2010 target of RMB 4,150, although this is much lower than the average urban per capita income (Figures 5.4 and 5.5).

Figure 5.3 Sub-Sector Share of Agriculture

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Source: National Bureau of Statistics

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Figure 5.4 Rural income per capita growth accelerated further since 2005

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Figure 5.5 Urban income per capita growth was consistently higher, widening the gap

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5.39 The rapid increase in rural incomes during 2005-2007 has been mainly fueled by 3 key factors. First, the terms of trade increased significantly, because of higher agricultural output prices. Real agricultural GDP growth was a modest 5 percent in 2006 and 3.7 percent in 2007. However, rapid increases in agricultural output prices have been an important driver of farmers’ income growth in 2007 (Figure 5.6), particularly since agricultural input prices lagged output prices (Figure 5.7).35 Second, lower taxation and higher subsidies and transfers. As mentioned, this is perceived as one of the key factors boosting income growth. Third, wages from off farm employment have risen rapidly—with steady urbanization as an important factor. China is well on track to reach urbanization and urban job generation targets. With an annual growth of 1 percentage point, China continued its urbanization trend, started in the mid 1990s (Figure 5.8). Urbanization will only need to continue at 0.7 percentage points per year to reach the 47 percent target for 2010. Having generated 11.9 million urban jobs per year since 2005, the country is also well on track to reach its goal of 45 million new urban jobs by year 2010.

Figure 5.7 Growth of agricultural input and Figure 5.8 Urbanization

35 An 18.5 percent increase in agricultural prices in 2007 resulted in an overall expansion of agricultural GDP in 2007 of 16.9 percent.

Figure 5.6 Growth in agricultural GDP, agricultural prices, and agricultural output

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output prices

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yoy)Output priceIutput price

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1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

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Source: National Bureau of Statistics

5.40 At the same time, the rural-urban income gap continued to increase. No explicit targets have been set to assess the balance of rural-urban development. However, the quantitative targets for per capita income in rural and urban areas imply a target of an unchanged income ratio. While rural income growth accelerated, real urban income growth accelerated even further to 12.2 percent in 2007 with urban income exceeding its 2010 target of RMB 13,390 per capita on average. Thus, the acceleration in rural income growth was insufficient to keep up with urban income growth and the urban to rural per capita income ratio increased from 3.2 in 2005 to 3.3 in 2007 (Figure 5.9). Household income alone does not fully capture the evolution of living standards, and rural access to education, health, and social protection has increased substantially (see Chapter 6). While a thorough analysis is not possible yet, given data constraints, it is possible that the disparity in overall living standards has developed more favorably.

5.41 Access to social services in urban areas for rural migrants could be further facilitated to foster off-farm employment generation and successful integration. Even though the hukou system has been relaxed to allow mobility, migrants continue to face difficulties in accessing social services in urban areas, mainly education for their children and health care. By law, rural migrant worker’s children are allowed to attend schools in urban areas where their parents work. Some cities actively facilitate the school enrollment of the children (e.g. Guangzhou, Chongqing). Other cities (e.g.

Figure 5.9 The Rural-Urban Income Gap

2.52.62.72.82.93.03.13.23.33.43.5

2001 2002 2003 2004 2005 2006 2007

Ratio

Ratio urban/rural income

Source: National Bureau of Statistics

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Beijing), require that the parent’s present five different documents before enrolling the child in school.36 In effect, these requirements exclude the children of most migrant workers from the regular Beijing public schools, forcing them to enroll their children into unlicensed schools that are set up for this group of children in the outskirts of Beijing - usually of inferior quality.

Table 5.12 Budgeted Central Government Spending on Agriculture and Rural Areas

 RMB billion Year 2005 Year 2006 Year 2007 Planned for Year 2008

Total Central Government Spending overall

3,390 4,042 4,956.50 6,078.60

Total Central Government Spending on agriculture and rural areas

297.5 339.7 431.8 562.6

Government spending in rural areas as a percentage of total government spending.

9% 8% 9% 9%

Source: National Bureau of Statistics of China

5.42 The large increase in the domestic terms of trade for agriculture cannot be expected to continue. These developments suggest that under the current, still imbalanced, pattern of growth it is difficult to decisively halt urban-rural income disparity. The domestic terms of trade may well stay in favor of the rural areas for some time to come, given the expected structural shift in international demand for agricultural goods and food prices following the emergence of bio-fuels. However, future rural income gains will have to come from increases in both off-farm incomes and agricultural productivity growth, whose contribution to the current rural income growth increase has been more modest. The rapid increase in urban-rural income transfers, akin to OECD type agricultural policies, may not be desirable from an efficiency point or fiscally sustainable over time.

Emerging Themes and Recommendations

5.43 Factors that are helping the Government to meet the targets include: (i) committed government policies; (ii) increased financial resources, both in terms of investments and transfers (although more in some areas than in others); and (iii) higher agricultural product prices that have helped boosting farmers’ income. In particular, five newly introduced programs are highlighted time and time again, also by farmers themselves, as important contributors to the increase in rural incomes and living standards: (i) the abolishment of agricultural taxes and fees in 2006; (ii) higher direct agricultural subsidies;37 (iii) the introduction of free compulsory education in the countryside; (iv) the introduction of rural cooperative medical insurance schemes; and (v) the extension of the minimum living standard allowance (“dibao”).

36 These are the original hukou, a certificate from the home county that no parent is left in the village enabling the child to enroll at school there; temporary urban household registration; work registration; and certificate from the urban school district designating which school the child belongs to. 37 Direct agricultural subsidies in 2007 made up about an average of 1.3 percent of farmers’ income that year.

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5.44 Although the 11th 5YP’s hard targets will likely be met, more progress is needed on achieving more balanced development between the urban and rural areas so as to provide more equitable outcomes from China’s rapid economic growth. Conditions are improving in the countryside, but they are improving even faster in the urban areas. As a result, urban-rural disparity in incomes and living standards is still increasing.

5.45 A significant factor inhibiting the Government to meet the intrinsic objective of more balanced development is the capital-intensive industry-led overall pattern of growth. This has lead to slower urban job creation, and therefore to slower movement of labor out of agriculture, where productivity and incomes are significantly lower than in urban areas (Chapter 1). This, in turn has dampened poverty reduction.

5.46 Looking ahead, a dual approach is necessary to sustainably contain the rural-urban income gap and reduce political pressures for economically inefficient income support. Such a dual approach fosters both reallocation of labor from rural to urban areas, and increases rural labor productivity, both on and off the farm. Such a dual approach is necessary because, while more labor intensive urban growth would help, the absorption of rural labor in the urban labor force may in itself not be fast enough to effectively close the rural-urban income gap. Moreover, it could lead to urbanization of poverty and the onset of diseconomies of agglomeration. On the other hand, there are limits to the increases in urban-rural income transfers that can be sustained. This suggests the need for more, but also more efficient public spending on rural public goods – both the “hardware” and the “software.” Specifically, there is a need to invest more in agricultural science and technology; extend more support to environmentally sustainable techniques for staple crop production; and foster agricultural diversification to higher value products

5.47 The efficiency of the various rural programs and investments also deserves further attention. A rigorous assessment of the efficiency of the various programs and investment is important to inform policy making. However, the quality of the data to track inputs and link inputs to output remains weak, rendering it difficult to properly assess progress and evaluate the effect of the Program. All entities interviewed for this assessment noted that they did not have adequate management information systems or monitoring frameworks that would enable systematic tracking of policies, programs, and investments at the various government levels.

5.48 Our key recommendations are thus related to improving the effectiveness of the Government's investments in the rural areas, improving the provision and delivery of public services, and improving the enabling environment for agricultural modernization.

(i) Improve the Effectiveness of Rural Public Investments

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5.49 Effectiveness of rural public investments can be improved by strengthening the implementation arrangements along different dimensions:

Coordination and consolidation. Improve coordination among investment programs and consolidate programs to avoid duplication and inefficiencies and reduce the administrative burden of the large number of programs on local governments.

“Software.” Increase the attention for strengthening of institutional, human and resource capacity. When developing investment programs, focus equally on “hardware” and “software.”

Encourage Farmers Participation. Participation by communities in the design, delivery, and monitoring of public programs and services increases their effectiveness.

Performance Based Funding. Allow more flexibility at local levels by reducing the earmarking of funds. More performance-based program funding for certain minimum outcome targets could be provided instead. Improve accountability through proper Monitoring and Evaluation (M&E) and enforcement of agreements.

5.50 The 12th Five Year Plan could usefully include more clearly defined outcome targets and use an M&E system allowing assessing progress towards these targets and the effectiveness of the different programs and investments in contributing to these targets. In developing and implementing an M&E system the focus should be more systematically on outcomes and impacts, and less on inputs per se. Without proper statement of sub-objectives, and without properly defined outcome and impact indicators and follow up monitoring and evaluation, the risk of sub-optimal use of funds is high.

5.51 Tracking of progress on targets could be improved by establishing standardized management Information Systems (MISs) for clusters of investments. They have to be able to capture information from all levels of government and share information at all levels of governments, horizontally and vertically. Currently, input information is compartmentalized at each government unit and level. It is impossible to access comprehensive and accurate information either horizontally or vertically for the same sub-sector. For example, to get a full picture of investments going into biogas, one would have to access information separately (horizontally) from NDRC, MOA, Leading Group for Poverty Reduction and others, and then separately (vertically) from each level (province, prefecture, county) of each ministry. For example, NDRC does not have access to investment information from lower levels of government. It is likely that the efficiency of the various development programs could be significantly enhanced through more refined targeting, better monitoring, and introduction of impact evaluation.

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(ii) Improve the Provision and Delivery of Rural Public Services

5.52 Rural public services can be improved by strengthening the accountability relationships among the key stakeholders including: (i) clarifying and specifying responsibilities for each level of government and for service providers; (ii) ensuring adequate financing (match responsibilities with finance), but also adjusting the fiscal system to improve the quality and efficiency of the public services provided by local governments; (iii) building a robust information reporting and evaluation system, and (iv) creating mechanisms for effectively enforcing responsibilities.

(iii) Focus on an Enabling Environment for Agricultural Modernization

5.53 Agricultural modernization in China will depend on the government’s ability to develop an enabling environment that promotes agricultural modernization. This includes: (i) deepening and speeding up land related reforms; (ii) improving the agricultural sector’s “software” infrastructure; (iii) promoting innovative “industrialized” agriculture; (iv) improving systems for food safety and quality; and (v) broadening and improving agricultural producers’ access to adequate financial services.

Land Issues. The challenge is to find better tools that limit hardships experienced by affected individuals and communities, while enhancing the efficiency of necessary public land acquisition for development objectives. Better implementation of the existing laws and regulations requires independent and comprehensive monitoring of the local progress, large awareness campaigns of farmers’ rights, strong linkage to local government officials’ performance evaluation, reasonably independent judicial systems along with legal-aid services for farmers. A number of concrete steps could be taken to strategically strengthen and expand land tenure rights, some of which are already being tested in pilot settings.38

Agricultural Science and Technology. More government funding should be allocated to “software”, including agricultural research and development and its extension, and improved quality of training to farmers. The existing agricultural extension system must urgently be revamped by: (i) ensuring continuous upgrading of the extension workers skills, including

38 These include 1) making collective construction land marketable and allowing land tenure holders to sell directly to new users in the case of land conversions for “non-public interest” uses—pilot experiments in regulatory reform for collective construction land have been conducted in a number of provinces with some promising results; 2) strengthening efforts to protect rural land users from improper actions by collective leadership, both in the context of government land requisitions and in the implementation of the Rural Land Contracting Law; 3) introducing the right to mortgage farm land; 4) developing an effective registration system for all land rights, including rural land; 5) resolving ambiguities concerning the nature of collective ownership, including narrow the scope of land expropriation by clarifying the definition of “public interest” in the Land Takings Law; 6) defining farmers’ housing plot rights as perpetual usufruct rights and expanding their transferability; and 7) strengthening legal literacy of farmers and officials.

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training in adult training methodologies and funding an adequate operational budget; and (ii) better promoting and providing agricultural extension non-government providers.

Farmers Cooperatives. In order to support a healthy development of farmers’ cooperatives, the government should focus on creating an enabling environment which includes: (i) strengthening farmers and local officials knowledge of the new law through awareness raising, information dissemination, and training; and (ii) Promoting access to financing by the cooperatives instead of providing subsidies which encourage the development of an unhealthy structure of the cooperatives.

Food Safety. Improvements in food safety and quality improve the nation’s agricultural competitiveness and benefits small farmers and larger farms. The government’s efforts in food safety and food quality can become more cost-effective by streamlining and clarifying responsibilities of the involved public sector agencies. In addition, as underscored by the milk products scandal, the government should focus on developing a proper framework for private sector incentives and focus on ensuring compliance with regulations.

Rural Financial Services: Speed up reforms. Encourage development of new financial products including medium and long term financing allow land user rights to be mortgaged, agricultural insurance.

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6. Improving Basic Public Services

This chapter evaluates the implementation of the 11th 5YP in the areas of social protection, education, and health.

A. Social Protection

Background and Key Objectives

6.1 The 11th 5YP proposes an ambitious set of priorities in the area of social protection. It recognizes that although significant achievements were made during the 10th Five Year Plan period in raising living standards, a number of challenges persist in terms of inequality between rural and urban areas, employment pressures, and the continued vulnerability of certain segments of the population, including the large number of rural-to-urban migrants. The 11th 5YP therefore covers a wide range of measures related to social protection, encompassing improvements in urban and rural social security as well as employment expansion and support for migrant workers.39

6.2 In the area of social insurance, the 5YP calls for the development of a social security system that is compatible with China’s level of development; is multi-layered, and has broad coverage. It calls for increased funding from the fiscal system and from multiple channels. In particular, the 5YP expected numerous improvements to the urban pension system, including expanded coverage, gradual funding of individual accounts, and higher level of pooling or strengthened provincial level fund equalization. It calls for reform of the pension system for civil servants and employees of public institutions, and for development of supplementary pensions by enterprises where conditions allow. It supports exploration for options of rural pension systems that are consistent with the rural economic situation and are compatible with other social protection mechanisms. The Plan also expects improvement to the unemployment insurance (UI) system, including the establishment of linkages between UI and employment promotion, as well as to work injury and health insurance programs. The Plan recognizes the importance of providing social security for rural-to-urban migrants, standardizing the contributions to and supervision of social insurance funds, and strengthening social insurance administration.

6.3 In the area of social assistance, the 5YP seeks to improve both urban and rural programs. The Plan calls for improvements in the urban dibao program, including an increase in the dibao benefit level. It requires the establishment of urban and rural medical assistance systems that cover recipients of the main social assistance programs (e.g. beneficiaries of urban dibao, rural tekun, and rural wubao programs). As part of the rural development strategy, the 5YP calls for the establishment of the rural minimum living allowance (dibao) program where local conditions permit, and for the

39 These measures are described in detail in Chapter 6 (Improve Rural Appearance), Chapter 21 (Promote Healthy Urbanization Process), and Chapter 39 (Improve the People’s Living Standard) of the 11th 5YP.

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improvements to the wubao, tekun, and disaster relief programs. In addition, it states that city governments will provide assistance to urban homeless (especially the under-aged among them), and farmers who lost their land due to land requisition for urban construction.

6.4 In the area of labor market development, the Program lays out numerous measures aimed at expanding employment. Developing the services sector is recognized as key to increasing employment and domestic demand. Implementation of an “active employment policy,’ which includes policies to increase training and employment services, is identified as a priority. The Program includes implementation of the labor contract system, strengthening of the dispute resolution system, and protection of worker rights and interests. The Program highlights the safeguarding of migrant worker rights and interests and their integration into urban areas as particular priorities. In addition, the Program calls for implementation of the minimum wage policy and a gradual increase of the minimum wage level.

6.5 Indicators for social protection objectives are provided in the overall 5YP as well as the 5YPs of the Ministry of Labor and Social Security (MOLSS) and Ministry of Civil Affairs (MCA)40. The overall 5YP provides one social protection-related indicator on the expansion of basic old age insurance in urban areas. The Ministry-specific programs provide additional indicators for social insurance and social assistance. The indicators and targets are:

Increase coverage of basic old age insurance among urban residents from 174 million participants in 2005 to 223 million in 2010;

Raise the number of unemployment insurance participants from 106 million in 2005 to 120 million in 2010;

Increase the number of work injury insurance participants from 85 million in 2005 to 140 million in 2010;

Increase the number of maternity insurance participants from 54 million in 2005 to 80 million in 2010;

Increase the ratio of rural wubao beneficiaries who receive centralized care (i.e. in welfare homes) by 5 percent each year;

Provide 14.84 beds in rest homes for every 1,000 elderly people; and

In each city, have at least one children’s welfare home as well as an assistance and protection center for homeless children.

Overall Progress, Main Initiatives, and Key Results41

40 The Ministry of Health program also specified some targets on the coverage of the new rural cooperative medical scheme. 41 Major social protection policies introduced in the first half of the 11th 5YP period are listed in Annex 6.

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6.6 In the first half of the 11th 5YP implementation period, China made significant progress toward its social protection objectives. It is on track to achieving its targets and is close to meeting targets ahead of schedule in some cases (Table 6.1). In selected areas (e.g. rural dibao), with the decision to scale up the program nationwide, the Government has moved beyond what is envisaged in the 5YP.

Table 6.1 Social Protection - 11th 5YP Targets and Progress at Mid-Term

Indicator 2005 2007 Target Percent Completed (%)

Basic old age insurance – contributors (millions) 175 201 223 54

Unemployment insurance – contributors (millions) 106 116 120 71

Work injury insurance – contributors (millions) 85 122 140 54.5

Maternity insurance – contributors (millions) 54 77 80 88.4

Rural wubao – ratio of beneficiaries receiving centralized care (%)

19.842 23.6 50 12

Beds in rest homes per 1000 elderly people 9 n.a. 14.84 n.a.

Cities with at least one children’s welfare home and assistance and protection center for homeless children

n.a. n.a. All cities

n.a.

Source: MOLSS ; http://www.molss.gov.cn Note: Indicators and targets are from the overall 11th Five Year Program and Ministry-specific Five Year Program from the MOLSS and MOCA.

6.7 Across the various social protection-related areas, the Government has enacted legislation to lay the groundwork for reforms and adopted regulations aimed at improving program implementation and management. The Government has also introduced pilot programs to test new approaches and help inform the development of strategies for broader implementation. The main initiatives undertaken in the past three years are summarized below, with information on key results and progress in meeting numerical targets where available.

(i) Social Insurance

6.8 China has a relatively developed social insurance system among countries of similar levels of development. However, the system was developed partly in the era of the planned economy and has been heavily burdened by the legacy cost. Its design is also not entirely compatible with the modern market environment where labor market competitiveness and mobility are important features. As China urbanizes, how to develop integrated social insurance systems that cover urban and rural population is another major

42 Only the number of wubao beneficiaries receiving centralized care can be obtained. The ratio is calculated based on data concerning wubao beneficiaries from speech of MOCA officials.

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challenge.

6.9 During the first phase of the 11th 5YP period, the government continued to experiment and reform the key social insurance programs, with the emphasis on expanding program coverage. Progress was made in coverage expansion, unification of policy parameters, and the decision to increase the pooling level. There has also been heightened attention paid to the management of social insurance funds. A Social Insurance Law is being drafted and is expected to be reviewed in 2009. To ensure that the system can indeed provide effective protection while being conducive for labor market development, it is important to recognize that the social security reforms introduced in the mid 1990s are still very incomplete. The government needs to rethink the overall structure of the system and take a more integrated approach to ensure that the needs of urban and rural populations are addressed in a labor market-efficient and financially sustainable manner.

6.10 Old Age Pensions. Extending pilots conducted in Liaoning, Heilongjiang, and Jilin provinces, the Government made changes to the urban enterprise pension system in line with the objectives of the 11th 5YP. The State Council introduced in December 2005 (Document #38) policy changes for more gradual funding of individual accounts, closer linkages between pension benefits and length of contribution, and the formula used to calculate individual account pensions. Document 38 also expanded coverage for the self-employed and informal workers, who can enjoy the same benefit level as enterprise employees but with a lower level of contributions at only 20 percent of the local average wage. Annex 6 provides a summary of major changes from the previous policy.

6.11 The Government has also issued regulations to increase higher level pooling of pension funds and to unify key policy parameters. In March 2008, the government announced the plan to achieve provincial level pooling of pensions by the end of 2009. Recognizing the fact that limited portability of pension benefits has led to withdrawal of participation, the government is paying special attention to benefit transferability. It is anticipated that a regulation will be issued in 2008 that stipulates specific measures to ensure the portability of pension benefits when moving across provinces. Meanwhile, the government is moving further toward a pension system that is unified in terms of contribution base, contribution rates, parameters to establish pension benefit, as well as pension fund administration.

6.12 There have been debates concerning the design, size, and management of individual account pensions. Experiences of the northeast pilots also provided some observations. Up to March 2008, the Government has expanded pilots for funding of individual accounts to 14 provinces. The share of payroll that goes into individual accounts has been reduced substantially from originally envisaged, indicating a much more gradual funding strategy.43 A more flexible “dynamic funding” approach was recently adopted, allowing the provinces to determine the size according to the local wage level. That is, the provinces may decide to increase the scale of funding of

43 The size of individual account has reduced from 11 percent envisaged in the 1997 reform to 8 percent in the Liaoning pilot, 5 percent in Heilongjiang and Jilin pilot, 3 percent in the 8 provinces piloted in 2005.

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individual accounts according to the wage growth situation. The central and local governments provide a flat subsidy according to a funding ratio. However, the exact percentages of contributions and subsidy levels vary among the provinces—with the central government subsidy capped at 3.75 percent—and have been adjusted over time.

6.13 The coverage of the urban basic old age insurance scheme increased from 175 million contributors in 2005 (about 31 percent of the total urban population) to 201 million contributors in 2007 (34 percent of the total urban population), representing 54 percent completion of the 11th 5YP goal of 223 million contributors by 2010. Nationwide, the goal of maintaining three consecutive years of increase of enterprise employee pension benefits by certain percentages was realized, the average benefit increasing from RMB 714 in 2005 to RMB 963 in 2007. The MOLSS plans to launch another three-year pension benefit increase during 2008-2010.

6.14 For the pension scheme for civil servants and public institution employees (“PSU pensions”), an executive meeting of the State Council in February 2008 approved a plan for piloting reforms in five provinces. The main thrust of the reform proposal is to adopt a common policy framework for the PSU pensions as the main enterprise pension system. The main changes proposed include: sharing of responsibility for pension contributions between government institutions and individuals, linking benefit levels to individual contributions, gradual introduction of provincial pooling, and establishing “institutional annuities”, to be managed by qualified investment managers.

6.15 In the area of voluntary pensions (enterprise annuity), the MOLSS issued regulations on standardizing the management of enterprise supplementary pension insurance, changing its name to ‘enterprise annuity’ and transferring management responsibility to qualified investment managers and asset trustees. By the end of 2006, about RMB 91 billion had been accumulated in the enterprise annuity scheme, with over 10 million employees from over 24,000 employers participating. From 2005 to 2007, the MOLSS approved 24 new qualified enterprise annuity management institutions, bringing the total number to 61. By the end of 2007, almost all former enterprise annuities — which totaled about RMB 130 billion — were handed over to qualified investment managers and asset trustees.

6.16 To support the development of rural pensions, the MOLSS launched a three-year pilot for a modified voluntary rural pension scheme in eight counties/districts in January 2006. The main features of the piloted policies include: local government provided matching subsidies for pension contributors in poorer areas, minimum contribution levels based on the local dibao threshold or other thresholds such as local average net income, flexibility for the local government to set the benefit levels based on amount of contribution or other locally determined factors, and allowance for beneficiaries to borrow money against their individual accounts in times of emergency. The target is to increase the rural pension participation rate to 60 percent nationwide by 2020.

6.17 Unemployment Insurance. In line with the objectives of the 11th 5YP, a State Council document issued in February 2008 calls for closer linkages between

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unemployment insurance, social assistance, and employment promotion. It mandates more stringent eligibility requirements tied to vocational training and public service participation. The MOLSS also launched a pilot to expand UI fund expenditures in seven provinces in January 2006. The pilot allows UI fund expenditures to be used for vocational training, job introduction services, interest deductions for microfinance, and other subsidies for UI beneficiaries as approved by provincial/municipal governments. The Government is now in the process of amending the 1999 regulations on unemployment insurance. Some provinces have also started amending the provincial unemployment regulations, with the main focus being to expand the coverage to rural migrants.

6.18 From 2005 to 2007, coverage of the UI program increased from 106 million contributors to 116 million contributors, reaching 39.5 percent of urban employment. This represents 71 percent completion of the goal of 120 million contributors by 2010 as specified by the 11th 5YP. In addition to coverage expansion, UI benefit levels have also increased significantly. By the end of 2007, per capita UI benefit level increased by an average of 15 percent in 29 provinces.

6.19 Work Injury Insurance. The MOLSS is drafting an amendment to help modernize the work injury insurance system, prioritizing precautions against work injury while also supporting work injury compensation and recovery. The main innovation is the allocation of a certain amount of work injury insurance reserves for work injury precaution, which would support enterprises in conducting production safety-related training. The MOLSS has also issued regulations that support the 5YP objective of safeguarding the rights and interests of migrant workers, who are concentrated in occupations that expose them to greater risk of work-related injury and illness. The regulations aim to extend work injury insurance to almost all rural migrants employed in high-risk industries and require that construction companies make work injury insurance contributions for rural migrant workers on time and in full.

6.20 Coverage of the work injury insurance program increased from 85 million contributors in 2005 to 122 million in 2007 contributors, accounting for about 42 percent of urban employment. This represents a 54.5 percent completion rate of the 11th 5YP goal of 140 million contributors by 2010. Around 39.7 million of these contributors were migrant workers, indicating an increase of over 27 million compared to 2005. Around 174,000 high-risk enterprises made work injury insurance contributions for their employees, covering 16.64 million rural migrant workers and accounting for 13.2 percent of the total number of work injury insurance contributors nationwide. The total amount of work injury insurance funds increased from 6.5 billion RMB in 2003 to 25 billion RMB at the end of 2007, while the number of beneficiaries increased from 300,000 to 940,000.

6.21 Social Insurance Administration and Financial Management. The Government is undertaking a number of reforms to advance the 11th 5YP objective of improving the administration and financial management of social insurance programs, including the development of a standardized management system and measures to build

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capacity for implementation. Recent regulations have also strengthened the audit system for social insurance programs, requiring that audits cover at least one-third of contributors, and established a four-level (county-municipality-province-central) system for off-site surveillance with a unified database.

6.22 In 2006 and 2007 major pension fund corruption cases were identified. The National Audit Office conducted major audits of social insurance funds in 2006 and 2007at the provincial and county levels. Audits in 2006 covered three categories of social insurance funds, namely pension, medical, and unemployment insurance programs. The main problems identified by the audits included misuse of social insurance funds — for example for investment, lending, or expenditures that should be covered by local budgets – and poor management.44 In 2007, nationwide audits covered the other two categories of social insurance funds – the work injury and maternity insurance funds. At the same time, voluntary audits of the rural pension insurance fund and other local social insurance funds were conducted at the provincial and county levels.

(ii) Social Assistance

6.23 The draft Social Assistance Law is expected to be an important piece of legislation that will define the overall approach to and framework of social assistance. It provides guidance on the eligibility criteria, application procedures, benefit levels, and other parameters for the dibao program; special assistance to low-income families; wubao program; disaster relief; programs targeted at specific groups such as the elderly, disabled, and homeless children; and other assistance programs. It also addresses financing issues and stipulates that social assistance expenditures should be covered by local government budgets, although the central government may provide support to areas facing financial difficulties or large natural disasters. Local governments may establish social assistance preparation funds equivalent to 1 percent of local government expenditure to supplement expenditures on existing social programs or for unexpected social assistance expenditures.

6.24 Rural and Urban Dibao Programs. The single biggest breakthrough in the area of social assistance is the decision of the State Council to roll out the rural dibao program on a nationwide basis, indicated in the July 2007 document. The rural dibao program is a poverty gap program for the poorest of rural residents, using a similar policy framework and features as the urban dibao scheme. The state council decision lays out basic policies such as the establishment of eligibility criteria, means-testing mechanisms, and program management. It also indicated that the program is expected to be financed by the local government, with inputs from the provincial and central governments as needed. Implementing regulations for the program are currently under preparation.

6.25 With the active experimentation in the last few years and the 2007 central government decision, China’s dibao system has experienced rapid expansion. By June 2007, all 31 provinces had established rural dibao. As of the end of 2007, the number of

44 Audit Results of Enterprise Employee’s Old-age Pension Insurance Fund, Urban Employee Basic Medical Insurance Fund and Unemployment Insurance Fund (Document No.6, 2006).

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rural dibao beneficiaries had grown to 34.5 million individuals and 15.7 million households. The total expenditure and the average benefit level have also increased substantially (Table 6.2).

6.26 Supporting the 11th 5YP objective of increasing urban dibao benefit levels, the urban and rural dibao benefit levels were raised in February 2008 by 15 RMB per month and 10 RMB per month, respectively. The regulations also permit better-off areas to implement higher increases. The Regulations on Urban Dibao, issued in 1999, will be amended beginning in 2008 and are expected to be submitted for approval in 2009.

Table 6.2 Indicators for Urban and Rural Dibao, 2005-2007

Indicator 2005 2007Urban dibao No. of beneficiaries (millions) 22.34 22.71

No. of beneficiary households (millions) 9.95 10.66

Average benefit level (RMB/person per month) 156 182.4

Urban dibao expenditure (billion RMB) 19.07 27.48

Rural dibao No. of beneficiaries (millions) 8.25 34.52

No. of beneficiary households (millions) 4.06 15.73

Average benefit level (RMB/person per month) 76 70

Rural dibao expenditure (billion RMB) 2.53 10.41

Source: Statistical Communique of Civil Affairs (2005, 2007), and Civil Affairs Statistical Yearbook 2007. Note: For 2005, statistics are mainly from the Civil Affairs Yearbook which in some cases are different from those from the statistical communiqué.

6.27 Notably, as a result of the nationwide expansion of the rural dibao system, most rural tekun (extreme poor) are now covered by the dibao program. At the end of 2007, only 300,000 people in 147,000 rural households were receiving tekun program benefits, a decrease of 96 percent compared to 2006.

6.28 Wubao Program. In January 2006, the State Council issued regulations that shift financing responsibility for wubao from village reserves to local fiscal budgets. The regulations also stipulate that instead of village committees or town governments, the provincial government or municipal/county governments with approval of the provincial government will be responsible for determining wubao benefits. Supporting regulations call on local governments to standardize eligibility approval processes, ensure stable financing for the wubao program and set aside funds within the local budget (although poorer areas may receive central government support), gradually expand centralized care, set benefit levels according to the local situation, and strengthen program management. Other regulations mandate increased government support for the construction of centralized care facilities and improved living conditions for decentralized care

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beneficiaries.

6.29 Under the 11th 5YP, the aim is to increase the ratio of rural wubao beneficiaries receiving centralized care to 50 percent by the end of 2010, with an additional 2.2 million beds in centralized care facilities. At the end of 2007, the total number of rural wubao beneficiaries was 5.3 million, of whom 1.2 million or 23.6 percent were receiving centralized care.

6.30 Disaster Relief. Improvements to disaster relief have been introduced through policies and regulations that include: the establishment of a national disaster monitoring, forecasting, and assistance system; procedures for the government response to natural disasters; a promise to deliver disaster relief assistance within 24 hours after the disaster strikes; and the establishment of 1,000 comprehensive disaster relief demonstration communities, disaster relief teams in 85 percent of communities nationwide, and at least one provider of public information on disasters in 95 percent of communities.

6.31 In 2007, the direct losses from natural disasters totaled RMB 236 billion or 1 percent of GDP. Central and local government expenditures for disaster relief assistance totaled RMB 6.6 billion (0.03 percent of GDP) (MOCA, 2008). In 2005, the direct economic damage caused by natural disasters was RMB 204 billion (1.1 percent of GDP) and central and local government expenditures for disaster relief assistance were RMB 5.3 billion (0.03 percent of GDP).

6.32 Support to Land-Loss Farmers. Recognizing the vulnerability of land-loss farmers, the Government has adopted targeted policies to provide them with employment training, social security, and other types of social protection. The regulations mandate different benefit levels according to the specific situation of the farmers, with financing responsibility to be shared among the farmer, village, and local government.

6.33 Institutional Care for Children and the Elderly. There has been a substantial increase in the number of beds in rest homes for the elderly and setting up children’s welfare homes. From 2005 to 2007, the number of welfare homes for both elderly and children increased from 38,000 (with 1,502,000 beds) to 42,000 (with 2,046,000 beds). In 2006, China had 31,000 beds in rest homes for children and 1,136,000 beds in rest homes for wubao beneficiaries,

6.34 Temporary Assistance. To support individuals in both urban and rural areas who may experience transient poverty or other emergencies, the Government issued regulations in June 2007 specifying the coverage, application procedures, methods of benefit determination, delivery methods, management, and financing of temporary assistance.

6.35 In 2007, over 5 million rural residents (0.7 percent of total rural population) received temporary assistance. To relieve the negative effects of high inflation, the central government allocated 2.36 billion RMB for an inflation subsidy for the poor.

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(iii) Employment

Consistent with the 11th 5YP of Labor and Social Security approved by the State Council in October 2006, the labor authority has placed policy and program focus on employment promotion, labor force quality, and legislative and regulatory development concerning labor protection. To promote job creation, the Program attaches priority to the development of the service sector. From 2004 to 2007, the share of those employed in the service sector grew from 30.6 percent to 33.2 percent, even though the share of the service sector in GDP did not increase (Chapter 3).

6.36 Employment Promotion. While the unemployment pressure from SOE restructuring has eased over the last few years, the Government continued to actively promote employment growth. In addition to containing urban unemployment resulting from the economic restructuring, significantly more attention has been placed on employment opportunities for segments of the labor force where policy and program support was considered necessary. The particular groups include the rural labor force, new labor force entrants, and household with no employed persons (“zero employment families”).

6.37 Numerous policies and pieces of legislation were promulgated to help promote employment and reemployment. A 2005 State Council document emphasized the importance of job creation, harmonious industrial/economic sector development, integrated urban-rural labor market development, and public employment services provision. One of the most recent developments was the adoption of the Employment Promotion Law, which mandates that the governments at various levels expand employment through measures such as economic development, coordination and regulation of the public labor exchange programs (“human resource market”), including guiding surplus agricultural labor to urban areas, improved employment services, strengthened vocational education and training, simplification of procedures for workers to start their own businesses, and the establishment of an unemployment warning system. It also requires that governments at or above the county level establish special funds for employment promotion.

6.38 To strengthen active labor market programs, the Government issued several regulations to develop service standards, expand the group of targeted beneficiaries, promote new employment service items, and strengthen skills development and business start-up training. In 2007, over 6 million people received reemployment training; over 600,000 people attended business start-up training. Nearly 10 million people received occupational qualification certificates. Around 5.2 million xiagang individuals or 60.8 percent of the total number of urban registered unemployed at the end of 2006 were reported to have achieved reemployment.

6.39 In terms of policies targeted at specific groups, the MOLSS issued a circular calling on provincial governments to assist zero-employment families in obtaining employment through various channels including public service posts, informal employment, and migration employment. The objective is to eliminate the existence of

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zero-employment families in well-off regions by the end of 2007 and in other regions by the first half of 2008. To promote employment among the disabled, the State Council issues regulations in February 2007 that introduce employment mechanisms for the disabled, favorable policies for enterprises with disabled employees, and specialized employment services for the disabled.

6.40 Migration and Skills Development. Rural to urban migration has continued on a large scale during the first phase of the 11th 5YP period. According to the rural household survey of the National Bureau of Statistics, the total number of migrants in 2006 was over 130 million. An estimated one in five rural workers is a migrant worker, and nearly one-half of the rural population lives in households with one or more migrant workers. Migrants account now for about one-third of total urban employment.

6.41 Recognizing the significant contribution of migration and the profound challenges it brings, the government took an active position to facilitate migration and to manage the process. The State Council Opinion on rural migrant workers issued in March 2006 and the establishment of an inter-ministerial joint conference on migration that includes 31 ministries represented a comprehensive approach to migration. Among the long term agenda, the focus of efforts in the labor and social protection areas is placed on skills development, employment services, and safeguarding the basic worker rights and interests of migrant workers.

6.42 Skills development has been put among the top priorities for labor market policies and policies on migration. Various government agencies are actively organizing skills development programs, including the MOLSS, Ministry of Education, Ministry of Agriculture, Leading Group on Poverty Reduction, and Ministry of Science and Technology. A multi-ministerial “Sunshine Program” was established and the MOLSS also launched a program for rural migrant workers in May 2006 aimed at providing non-agricultural skills training for 40 million rural migrant workers during 2006-2010. By the end of March 2007, both the central and local governments had invested RMB 2.1 billion in the rural migrants training program launched in 2006 and provided training for about 8.6 million rural migrants. The government estimated employment rate among the trainees was above 70 percent.

6.43 To support the 11th 5YP objective of establishing an integrated urban-rural labor market, the State Council selected Chongqing and Chengdu, two major municipalities in southwest China, as national pilots for this integrated rural and urban development in the context of rapid urbanization. Separately, MOLSS issued guidelines for piloting a unified rural-urban employment system in areas with better employment situations, stronger management capacity, and commitment to reforms and innovations. The pilots, which will run from 2006 to the end of 2008, aim to establish a unified employment management system, vocational training system, public employment service system, labor management system, and social security system in both urban and rural areas.

6.44 Labor Regulation. During the first phase of the 11th 5YP period, the government made significant progress to strengthen labor regulations and to better

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protect worker rights, especially among migrant workers. The work covers all important areas concerning labor regulation, notably labor contracts, minimum wages, labor dispute resolution. Concerning migrant workers, a series of regulations were developed at the central and local level to ensure that migrant workers receive on-time full wage payment, to improve their access to social benefits, and to protect the right of migrant workers to join trade unions and to be represented in employees’ representative conferences. The State Council opinion is supported by a number of implementation policies and regulations that lay out specific measures for achieving these objectives.

6.45 Contracts. A major development supporting the 11th 5YP goal of implementing the labor contract system was the enactment of the Labor Contract Law in June 2007. The law, which took effect on 1 January 2008, requires that employees have written contracts providing details such as contract term, job description, compensation, and working conditions. It limits the circumstances under which employers may revoke labor contracts and requires severance pay based on the length of time the employee has worked for the employer. The law also specifies legal liabilities for breaches of contract, use of violence or threats against employees, and other violations. While there was wide recognition of the need for formal labor contracts, concerns were raised by the private sector about the potential impact of the law on the overall cost of labor, foreign investment, and employment opportunities. The Chinese government went through an open consultation process during the period when the draft legislation was under review. It would be equally important for the government to monitor and assess its impact on worker protection, employment, and economic development during implementation.

6.46 Minimum Wage. The government has moved towards developing hourly minimum wages and exploring ways to adjust the minimum wage over time in a more consistent and transparent manner. In July 2007, the MOLSS issued a circular that establishes a system for regular adjustments to minimum wages. A draft regulation that establishes a collective consultation/bargaining mechanism concerning wage determination and increases is being completed. By end of 2007, 27 provinces had increased their provincial minimum wage and established wage reserve fund systems for on-time wage payments.

6.47 Dispute Resolution. The new Labor Contract Law requires that employers consult with trade unions or worker representatives, as ‘parties of equal status,’ on matters directly related to worker interests such as wages, work hours, leave and vacation, occupational safety and health, training, and benefits. The Government has been preparing laws and regulations to clarify some ambiguous aspects of the Labor Contract Law. For example, the new Labor Dispute Negotiation and Settlement Law, enacted in December 2007 and taking effect from 1 May 2008, establishes local labor dispute settlement committees and standardizes procedures for labor dispute settlements. The Employment Promotion Law, enacted in August 2007, strengthens worker rights by protecting workers from discrimination based on factors such as ethnicity, race, gender, and religious belief. It also prohibits discrimination against individuals with infectious diseases (excluding disease that is easily communicable) and rural workers entering cities for employment. The law allows workers who experience employment discrimination to

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bring a lawsuit to the people’s court.

Analysis of results, Conclusions, and Main Challenges Ahead

6.48 Overall, the Government has made considerable progress in the area of social protection and is on track to achieving the objectives laid out in the 11th Five Year Plan. If this momentum can be maintained, China should be able to meet its targets on — or even ahead of — schedule.

6.49 Regarding the content of the Plan, the social protection objectives and measures are comprehensive and highly relevant to the current situation. The Plan responds directly to the challenges China faces in addressing vulnerability, tackling inequality, and improving the efficiency of the labor market and recognizes the cross-cutting nature of the issues. The objective of social protection is consistent throughout the Plan, emphasizing expanded coverage in both urban and rural areas and better implementation and management of programs.

6.50 One possible lesson for future planning is in the formulation of indicators. The overall Five Year Plan and Ministry-specific Plans cover a wide range of social protection measures but provide a very limited set of indicators and targets. A more comprehensive set of indicators, including not only coverage rates but also other dimensions relevant to the various objectives, such as equity, economic efficiency, administrative efficiency, etc. would greatly facilitate the monitoring and evaluation of implementation progress. Furthermore, for indicators related to coverage, it would be useful to set targets according to coverage rates—for example, percentage of total urban workers contributing to pensions or percentage of migrant workers covered by work injury insurance. Since the ultimate strategic objective is to extend coverage to the full target population, coverage rates would provide a better sense of progress than changes in the sheer numbers of individuals covered.

6.51 The progress that has been achieved toward the objectives of the 11 th 5YP can be attributed largely to the high level of Government commitment to improving social protection. The Government has adopted an ambitious set of objectives for expanding the coverage of programs and improving their implementation and management. The objectives have been supported by significant expenditures. Going forward, a key determinant of success will be how the various laws and regulations are implemented and enforced at the local level, how various policies and programs are coordinated, and how the fiscal responsibilities are shared by various levels of government.

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6.52 Providing effective and sustainable social support while maintaining a competitive and dynamic labor market will be the goal that the government will strive for in further developing its social protection programs. The review would like to highlight the following major challenges faced in advancing the social protection objectives of the Five-Year Program.

6.53 First, there is a need to develop a more integrated approach to social protection. On the one hand, despite the significant progress made in unifying the system, a high degree of fragmentation among and within programs remains. A good example is China’s public pension program which is still highly decentralized and fragmented – contribution rates vary across municipalities; risk pooling remains at the sub-provincial level in most cases; and portability of benefits is very limited. The separation of the enterprise pension scheme from the schemes for employees of public institutions hinders labor movement. On the other hand, as the government endeavors to expand the social protection coverage, there is a tendency to take a piecemeal approach and develop additional schemes to cover certain groups of population in need for support (e.g. land loss farmers, rural migrants). Such an approach will not only imply inefficient risk management, more importantly, it creates barriers for the functioning of a mobile and flexible labor market. It would be better to cover these new groups under existing schemes.

6.54 Second, the overall social protection program still has very limited coverage, and is heavily focused on the formal sector of urban China. Many programs are not able to help the large rural population and the growing informal sector which accounts for about half of the urban labor force. For example, public pension programs only cover less than a third of all workers. Developing suitable programs and instruments to protect the rural population is an intrinsically difficult task given the nature of rural income, the limited financial and administrative capacity, and the traditional yet evolving informal protection mechanisms in Chinese society. The task is made particularly challenging in the context of rapid urbanization and a highly mobile rural labor force. At present, most migrants are not covered by pension insurance and the program is not designed in a way that they can truly benefit from it. While the focus has been to first ensure that they have access to work injury insurance, much remains to be done in that area, as well as in health protection for them in urban areas. Allowing for benefit portability and linkage between urban and rural programs would be keys to successfully cover the broad population.

6.55 Third, striking the right balance between protection and competitiveness is a key challenge for the government. On the one hand, the overall breadth of social protection in China is limited, as reflected in the expenditure on social safety net as a percent of GDP, or as the overall program coverage of population. On the other hand, financed by social security contributions of more than 40 percent of the payroll, China’s social insurance system in urban China is very costly, and has major labor market implications. As the safety net programs are scaled up, concerns about their impact on the incentive to work and welfare dependency will become more significant.

6.56 Fourth, making appropriate financing arrangement across different levels of government will remain a key factor for the success of China’s social protection

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programs. The significant legacy cost of the pension insurance needs to be dealt with separately from the social insurance program by the Ministry of Finance, relieving the reformed pension system from its historical burden and distortion. The cost of social safety net programs cannot be totally born by the local governments as disadvantaged areas with the greatest need for protection oftentimes do not have adequate fiscal capacity. To fundamentally address the financial difficulties of poor areas in providing adequate social protection and address the inequality in access to social protection requires more systemic reform of the intergovernmental fiscal system.

6.57 Finally, while China made phenomenal progress in social protection administration, much remains to be done. One major issue is the development of a national social insurance administration. Without an effective national level authority, most programs will remain very fragmented and poorly managed. Better administration also requires clarification of the responsibilities for social insurance contribution collections, improved management information systems, much strengthened financial management and internal control, more developed means-testing methods for social safety net programs that are less discretionary than current practice, and finally much stronger capacity in delivering good quality service in all social protection programs.

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B. Health Services

Background and Key Objectives

6.58 The health sector has seen considerable progress during the 10th 5YP period. Government health spending increased, some major policy programs, such as New Rural Cooperative Medical System (NCMS) were initiated, and a rapid response system for health emergency and epidemics was established. By the end of 2005, China’s life expectancy had reached 72; maternal mortality was under 47.7 per 100,000, a 10 percent drop from 2000; infant mortality had dropped 40 percent from 2000 and was under 19‰; and 26.6 percent of the rural population was enrolled in the NCMS.

6.59 Building on these achievements, the health sector, along with other social sectors such as education and social protection are priorities in the 11th Five Year Program. The Program calls for comprehensive reform of the health system, noting that the current system does not meet the needs of the Chinese population. The main challenges identified include; a poorly developed health service system in rural areas; increasing inequality between rural and urban areas on access to health services and indicators including Maternal and Child Health (MCH) status; and a severe burden from major infectious and non-communicable diseases.

6.60 Accordingly, the 11th 5YP proposed a wide range of reforms in the areas of health protection, public health promotion and major disease prevention, the health service delivery system, and human resources. The overall objectives and quantitative indicators are provided in the overall Five Year Program as well as the five years program of relevant Ministries.

6.61 Overall objectives—to have established by 2010:

A basic health care system framework covering both the urban and rural population.

A relatively standardized NCMS system and a three- tiered rural health service delivery system, with an enrollment rate higher than 80 percent—the only obligatory indicator in the plan for health sector.

A developed community health service system in the urban area to provide public health as well as basic medical services to the urban residents.

A national essential drug system.

6.62 The overall 11th 5YP has only one health related quantitative indicator (the coverage of NCMS). The ministry-specific five year programs included more indicators concerning health outcomes, disease control, and health system development, as follows:

6.63 Major quantitative health outcome indicators for 2010:

Life expectancy of 72.5, a 0.5 year increase from 2005. Infant mortality lower than 14.9‰, a 21.6 percent drop from 2005.

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Under five-year-old mortality rate lower than 17.7‰, a 21.3 percent drop from 2005.

Maternal mortality lower than 40 per 100,000, a 16.1 percent drop from 2005.

EPI coverage 95 percent in urban and 90 percent in rural areas, a 10 percent increase from 2005.

There are several detailed targets on disease control (Table 6.3).

Table 6.3 Major Indicators on Disease Control

Indicators TargetNo. of HIV Infections < 1.5 millionGrowth Rate of STDs < 10%

DOTs Detection Rate for New Smear Positive Pulmonary TB >70%

Cure Rate >85%No of TB patients cured >2 millionHBV prevalence (whole population) <7%

HBV prevalence among children under 5 <1%

Percentage of Counties that has eliminated Iodine Deficiency (IDD) >95%Poliomyelitis 0Measles 50% reduction

Incidence for encephalitis, Rabies, Hemorrhagic Fever 30% reduction

Malaria Eradicated in 70% counties

Tobacco control Reduced tobacco smoking prevalence

Health Promotion Level of basic health knowledge reach 80%, 70%, and 60% in east, middle and west regions

Non Communicable Diseases Reduction of CVD, Diabetes, Cancers, COPDs and Injuries

Occupational diseases Reduction of incidenceMental illnesses Reduction of disability rate

Source: China’s authorities.

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Main Initiatives and Overall Progress to Date

6.64 This section looks at the major initiatives in the areas of health protection (insurance and medical assistance), the health delivery system, public health and major disease prevention, and health system reform, and assesses progress to date.

(i) Health Protection

6.65 The current health protection system in China consists of four independent sub-schemes: Basic Medical Insurance for urban employees (BMI), Basic Medical Insurance for Urban Residents (URBMI), New Rural Cooperative Medical System (NCMS) for rural residents; and Medical Assistance (MA) program for the poor. The four schemes are overseen by 8 different ministries. The 11th 5YP calls for the establishment of a multi-layer health security system as well as the expansion of Basic Medical Insurance. Specific priorities and goals are set for the different schemes in the ministry – specific 11th 5YPs and a number of measures have been adopted (Table 6.4).

Table 6.4 Health Protection - Targets and Progress

Indicator 2005 2007 Target for

2008

Target for

2010Number of counties with NCMS coverage (share of total, %)

21.7 86 100 100

BMI for Urban Residents Limited local pilot

National pilot began in 88 cities

50 100

BMI for urban employee (coverage, millions) 137.8 170 188 n.a.

MA in rural areas (coverage, %) 100 100

MA in urban areas (coverage, %) Just started 90 100 100

Source: China’s authorities.

A. New Rural Cooperative Medical System (NCMS)

6.66 The NCMS is on the top of government’s health agenda, as indicated by the fact that NCMS coverage is the only obligatory indicator on health in the overall 11 th 5YP. NCMS is a voluntary health insurance program for rural residents with contributions from individuals and the central and local governments, with partial reimbursement of health spending (about 30 percent for in patient care). It was piloted in 2003-2005 and rolled out during the 11th 5YP.45 The NCMS was specifically named ‘New’ to distinguish it from the ‘old’ cooperative medical system, which at its peak in the 1970s covered

45 The NCMS was first proposed in 2002 in “Decision of the Central Committee of the Communist Party, State Council on Further Strengthening Rural Health.” In early 2003, the State Council document ‘Suggestions on Establishing the New Rural Cooperative Medical System’ formally launched the piloting.

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almost 90 percent of China rural population but collapsed in 1980s along with the collective economy. The NCMS differs from the old system because of: (i) direct government contribution; (ii) a focus on inpatient expenses while the old CMS focused on outpatient services; (iii) higher risk pooling; (iv) the voluntary nature; (v) the assumption by the government of responsibility for its management; and (vi) the parallel creation of a medical assistance program.46

6.67 From 2003 to 2005, the implementation was focused on pilots in a few counties (cities). Under the 11th 5YP, the government decided to accelerate the implementation nation wide and set the goal of 80 percent coverage by 2008. To support this new objective, the government raised its contribution over time (Table 6.4). In 2006, the contribution from both central and local government was doubled to RMB 20 per person per year, bringing the total NCMS contribution to RMB 50 per person and bringing the share of the government contribution to 80 percent. In early 2008, the contributions doubled again. The central government also made its earmarked fiscal transfer more accessible. In 2005, only 75 percent of budgeted central funding was prepaid to the provinces; in 2006, prepayment was raised to 100 percent. Furthermore, starting in 2007 central transfers were adjusted at the end of each year based on the actual need of each province. If the actual need were more than budgeted, the province would be able to get the additional amount from the central government.

6.68 NCMS expanded rapidly in the first two years of 11th 5YP. The number of counties with NCMS rose from 21.7 percent at end-2005 to 50.7 percent at end-2006, and 86 percent by the end of 2007—the goal set in the 11th 5YP goal has been achieved one year earlier. The total number of enrollees and the total government contributions increased substantially as well (Table 6.5). The government adjusted its target several times. The latest goal is to roll out NCMS in all counties nationwide by the end of 2008.

Table 6.5 Progress Indicators on NCMS

Progress indicators June 2004 June 2005 end of 2006 end of 2007 New Target

for 2008 Counties covered / % 310 641/21.7% 1451/50.7% 2451/86% 100%Population covered (million) 95 225 508 n.a.Enrollees (million) 69 163 410 730Enrollment rate (%) 72.6 72.6 80.66 86.0Contribution (RMB)(central/local/individual) 10/10/10 10/10/10 20/20/10 20/20/10 40/40/20

Source: The 2003-2007 National NCMS conference document compilation.

6.69 The MoH and MoF in early 2008 jointly proposed new areas for piloting, including with an experiment on outpatient risk pooling, prefecture level pooling in less populous areas; coordination and harmonization with the urban resident basic health insurance so as to ensure basic medical protection for migrant workers and land-loss farmers; and a link with the national heath reform. It is expected that the 100 percent coverage target for 2008 will be achieved on schedule.

46 Former Vice Premier Madam Wu Yi, In her speech at National NCMS conference in 2003.

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6.70 NCMS is a significant step towards providing financial protection to rural residents when facing the burden of diseases. However, the current contribution (RMB 50 per capita in 2007) is very small relative to average annual health care expenses (RMB 749 per capita in 2006), making it hard to significantly reduce out of pocket health expenses. As shown in the MoH’s evaluation, when covered by NCMS, the actual reimbursement rate for in patient service remains as low as 30 percent. Moreover, evidence is mixed regarding the impact of NCMS on health service cost containment. The date suggests that average inpatient service expenditure has been contained in some places, whereas in other places there is evidence that service providers have increased service charges for the insured as the NCMS coverage has increased the affordability of health care to farmers. Questions have also been raised regarding the sustainability of the NCMS as a voluntary program because of the likely adverse selection issues. Nonetheless, the government has noted it is not seriously concerned about this issue as the program requires the farmers to enroll their whole family.

B. Medical Assistance Program (MA)

6.71 The aim of the MA program is to provide financial assistance to vulnerable groups in rural areas with their medical expenses and NCMS contributions. The MA budget is financed mostly by central, provincial, and county governments.47

6.72 In 2005, the State Council decided to introduce the MA program in the urban areas as well. Following the introduction of the URBMI (see below), MA takes on the new responsibility of helping with the contribution and copayment of the target population to this new urban insurance scheme. The target population for the MA scheme, including urban and rural areas, are the poor and disadvantaged groups (typically tekun, wubao, and dibao) and the households who suffer large and potentially impoverishing medical expenses.

6.73 The goal set in MOCA’s 11th 5YP is to establish an effective MA system that covers all urban and rural areas and all targeted populations by 2010. The priority in rural areas is to further standardize and refine the MA policy framework and to enhance the link with the NCMS. The priority in urban areas are to expand the pilots and harmonize the MA system with urban health insurance schemes.

6.74 MA has been rolled out rapidly in China (Table 6.6). Launched in 2003, all rural counties had implemented MA schemes by the end of 2006,. Piloted in urban areas in 2005, 86 percent of urban cities (counties) had established MA by end September 2007. The government budget on MA increased substantially, with the central government transfer rising by 133 percent to RMB 3.3 billion in 2007 and local governments” transfer up 40 percent to RMB 3.8 billion in 2007. During the first 3 quarters of 2007, MA assisted 7.6 million cases with their medical expenses, and 23.3 million cases with

47 Supplementary financing comes from the township level, lottery, donations, and development assistance.

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NCMS contribution. It has been reported that the MA scheme, along with NCMS, has significantly reduced the financial burden of diseases. For example, in Chongqing, MA beneficiaries only need to pay 20 percent of the total health expenditure out of pocket whereas the non-MA NCMS enrollees would need to pay about 60 percent out of pocket6.75 As a measure of the health safety net aiming at the poor and the vulnerable, the establishment of the MA program is a very important first step. However, its impact is still limited, although government financing is still increasing. Specifically, people who qualified as the beneficiary for this program, according to the list of MoCA, comprise less than 5% of the population. The majority of the vulnerable groups and people who are near poor can not benefit from the program. The government acknowledges the situation and is mobilizing support from possible resources, including charity and donation. The government, especially at the central level, is also committed to increase its spending on this program.

C Urban Resident Basic Medical Insurance (URBMI)

6.76 A major policy breakthrough is the introduction of Urban Resident Basic Medical Insurance (URBMI).48 This scheme is a voluntary health insurance program covering urban residents not covered by the urban basic health insurance scheme (BMI), a program for the urban formal sector. The main target groups are students, children and unemployed urban residents.

Table 6.6 Indicators on MA

Rural MA

Urban MA

  2005

2006 2007 percentage increase from 2005

2005

2006

2007 percentage increase from 2005

Total funding (million) 1095

2762 4863   1141

2101

3621.8  

Central government 300 950 2120 607 300 480 1220 307 Local government 795 1352 1981 149 841 134

91868 122

         County coverage (share of total, %)

 n.a 100 100     39.1 90  

         No. of beneficiaries (million) 11.1 18.2

335.65 221.2 1.63 2.11 5.64 246.0

No. of beneficiaries who reveived assistance in joining NCMS (million)

8.67 14.80

29.57    

Others 2.43 3.43 6.07           Subsidy level per capita (RMB) 385 365 420   319 485 365  

Source: Ministry of Civil Affaires

48 Anounced in ‘State council’s guiding principle on the pilot to establish urban resident basic medical insurance’ (2007).

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6.77 Following a similar policy framework as BMI, URBMI focuses largely on inpatient expenses and catastrophic outpatient expenses and is managed at the municipal level by MLoSS. Financed mainly from household contributions, governments at different levels provide subsidies.49 Employers are also encouraged to contribute for the family members of their employees. Municipal governments decide over the total contributions per person. The MoLSS recommends RMB 200 per person per year.

6.78 Preparatory work including pilots by local governments started in 2005, and the URBMI was piloted in 88 cities in September 2007. By the end of 2007, the scheme enrolled 40.7 million people, with an enrollment rate of around 60 percent of the estimated informal sector. The government has proposed an ambitious plan to expand the program, aiming at 100 percent enrollment by end 2010.50

D. Urban Employee Basic Medical Insurance (BMI)

6.79 The 11th 5YP of MoLSS calls for further improvements of the Urban BMI and further expanding its coverage.51 The Program targets coverage of 300 million people by the end of 2010 for BMI and URBMI combined, with the employee BMI targeted to add 40 million new enrollees in three years starting from 2006.

6.80 As the scheme expands, the major challenge is how to expand the coverage to enterprises with economic difficulties, citizens with flexible jobs, and the large flow of migrant workers. Together with other ministries (MOCA, MOF), MoLSS has issued several documents to provide policy support and guidance in addressing those challenges.52 At end 2007, 31 million new enrollees were added during the 11th 5YP. If progress remains constant, the government should be able to meet the 40 million new enrollees target by the end of 2008.

6.81 Overall, while a rapid expansion of health protection is being achieved well on or ahead of schedule, challenges remain. Concerns have also been raised regarding the design of the health protection schemes. First, all three insurance schemes (NCMS, URBMI, BMI) largely focus on inpatient care which dis-incentivize the provision of primary care and preventive care. The family saving account for outpatient service has very limited impact and is against the risk sharing principle of insurance. Second, the funds run considerable surpluses (over 30 percent in case of the BMI scheme), which implies a mis-match of revenue and expenditure. Better actuarial modeling seems

49 RMB 80 per person. For the central-western areas, the central government provides RMB 20 per enrollee. For vulnerable groups, including Dibao people, the government will provide additional subsidies. 50 In February 2008, Madame Wu Yi announced it will be rolled out to 229 cities in 2008 and enrollment should reach 50 percent by end 2008, 80 percent by end 2009, and 100 percent by end 2010.51 Managed by MoLSS, this is a mandatory medical insurance scheme for the urban formal sector (excluding civil servants and PSU employees), with both employers (6 percent of payroll) and employees (2 percent of payroll) contributing. At end 2005, about 50 percent of urban employees were covered. 52 Guidance on citizens with flexible employment in joining BMI was issued in 2003, and a ‘Notice on expanding coverage of migrant worker’ was issued in 2006.

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necessary to reduce the surplus and provide better coverage to the insured. Third, segmentation among the four independent health protection schemes also makes risking pooling and joint management difficult. Fourth, there has been very slow progress in terms of the provider payment reform. Up to know, fee-for-service is still dominant in China (covering about 80 percent of health). It has been proven internationally to be ineffective with regard to cost control. Now that China has done a remarkable job in rapidly setting up and rolling out a health protection framework in recent years, it is important to focus on addressing the concerns raised and further improve the system.

(ii) Health Service Delivery System

A. Rural Health Service Delivery System

6.82 The 11th 5YP calls for improving the rural health service delivery system, especially in the less developed central and western areas. The goal is to strengthen the three-tier health services delivery system in rural areas, with health facilities at county levels (including county hospitals and county MCH stations), township health centers, and village clinics. The target set in the 5YP of the MOH is one public THC in each township and at least one village clinic in each administrative village.

6.83 A major development plan named “Building and Development of Rural Health Care Delivery System” has been formulated and implemented. The main tasks are to improve the hardware of rural health institutions, to reform the management and operations and to enhance professional training.53 Another major initiative is the project to mobilize urban physicians to work in rural areas for 1-2 years.54

B. Urban Community Health Service System

6.84 The State Council views the urban community health service as an important and innovative approach for reforming the urban health care system. The urban community health service is meant to address the problems of ‘difficult to seek health care and expensive to have health care’ by developing community health centers (CHCs) and general practitioners whose services are less expensive and more easily available.

6.85 The objective during the 11th 5YP is to further expand community health services. The goal is to establish a well-developed urban community health service system for cities at the prefecture level and above, and for the cities at county level by

53 Since 2006, RMB 21.6 billion has been invested by government at different levels on the construction and renovation of rural health services facilities in central and western regions. Central government ear-marked transfers were RMB 2.7 billion in 2007, to be used for the construction of 3016 village clinics and basic equipment procurement for 11652 THCs. During 2005-07, the central government also provided RMB 942million for training of 1.45 million health professionals in rural areas including county health bureau directors, THC directors, medical professionals of THCs and village doctors. 54 The central government has transferred RMB 290 million for the project. Since 2005, around 15,900 physicians from secondary hospitals in the urban area of the relevant counties—that is, not from the large cities—have been assigned to 5295 Township health centers in 21 provinces.

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2010, although it is not clearly defined what a well-developed system stands for.

6.86 To support this objective, a number of government policies were promulgated. In 2006, the State Council issued a Policy Circular providing the guiding principle, development targets and 7 priority areas for the establishment of community health service system.55 In August 2006, a series of 9 supplemental policy documents on community health were consecutively issued jointly by a range of ministries and agencies to regulate and guide the implementation of the community health nation wide.56 In August 2006, 29 cities were selected for the national pilot for community health services .

Moreover, different levels of the government provided budgetary support.57

6.87 As the result of strong government commitment, the community health network was expanded rapidly throughout the country. By the end of 2006, 98 percent of cities at prefecture level and above have established a total of 23,000 community health service centers and stations, up 48 percent from 2005.

6.88 It is still too early to assess the impact of the community health centers on the accessibility and affordability of the health services. The service quality in these facilities needs to be improved. Residents who used to go to tertiary hospitals even for minor health problems need time to built their trust on community health services; arrangements for financing and operation of CHC are being explored; and it remains unclear how the CHCs can be effectively integrated into the existing health service delivery and insurance systems. International experience and best practice on primary health care, such as the gatekeeper approach of the UK, should be of value for China in its next development stage on community heath services.

(iii) Public Health and Major Disease Prevention

6.89 During the 10th 5YP the government established three major pillars for public health: the center for disease control, a center for health inspection, and a medical system for public health emergency and infectious diseases. With the importance underscored by the SARS episode of 2003, coordination on public health issues like HIV/AIDS, SARS, Avian Influenza, and Schistosomiasis became institutionalized and more systematic. The Cooperative Medical System was revitalized. To strengthen primary health care and public health, the rural health system was enhanced by hospitals and health centers at the county and township levels, and community health centers started. To improve maternal and child health (MCH) services and achieve the MCH related MDG targets, the Reduction of IMR and MMR and Elimination of Tetanus among Newborns was launched. A major accomplishment was the development of a web-based, real time disease reporting system covering major public health institutions down to township

55 Suggestions of the State Council on Development of Urban Community Health Service (2006, No. 10), the first policy circular on community health services issued at the level of the State Council.56 The 9 documents are listed in the Annex 8. 57 In 2007, the earmarked transfer from the central government for urban community health center development was RMB 3 per capita for the central area and RMB 4 per capita for western provinces. A fiscal transfer for training was also provided by the central government.

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level.

6.90 The Government has committed to universal access to basic health services. Discussions are underway to set up a National Health Commission to replace the current disease specific State Council Taskforces. A strategy setting forth the vision of Healthy China 2020 is under development. The State Food and Drug Administration has been merged with MOH. Major public health initiatives undertaken so far include: (a) an enlarged beneficiary package for public health—the National Immunization Program has been expanded and now covers prevention for 15 infectious diseases, with free treatment for HIV infection, TB, HBV, and piloting of free screening and treatment of RTIs among women of reproductive ages have been scaled up; (b) a safe drinking water initiative has been launched with a investment of RMB 65.5 billion to improve access to tap water in rural areas; (c) a standardization movement has been underway in order to improve the performance of CDCs. (d) reduction of IMR and MMR and elimination of Neonatal Tetanus Project have been continued; and there have been discussions on free hospital delivery for all pregnant women.

6.91 To support and sustain these efforts, government spending on public health has increased significantly (Table 6.7). From 2003 to 2006, the share of public health expenditure in total health expenditure increased by 1 percentage point while the share of health in total government spending remained around 4.5 percent from 2003 to 2006. The increase in public spending is a welcome achievement and should serve as a basis for improvements in health services.

Table 6.7 Total Government Expenditure and Spending on Health (change, percent)

Source:

China’s authorities.

6.92 Implementation of the health services reforms under the 11th 5YP is progressing unevenly. With respect to the key health status indicators, targets for 2010 for average life expectancy and MMR have already been achieved. It is very likely that the targets for 2010 for IMR and U5MR will be achieved in 2008. On vaccine preventable diseases, only the coverage for DPT and OPV is lagging behind the target of 90 percent population coverage by 2010. Otherwise the coverage of key EPI vaccines has reached the national target.58

58 EPI coverage for different diseases is used as a proxy indicator for vaccine preventable diseases.

Year Total Health Public Health2000 20.5 10.7 n.a.

2001 19.0 12.8 13.2

2002 16.7 13.5 19.1

2003 11.8 22.9 46.8

2004 15.6 15.8 18.0

2005 19.1 20.0 26.5

2006 19.1 14.6 15.6

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6.93 On key disease prevention and control, targets for 2010 for HIV infection, DOTs detection, the cure rate for new smear positive TB, and HBV prevalence rate for children under 5 years old have been achieved. The overall HBV prevalence rate is very close to the target of 7 percent in 2010. However, there are serious challenges on tobacco control, rural water and sanitation, birth defect prevention. There is also a considerable gap between the most recent coverage rate of Iodine Deficiency Control of 87.9 percent and the target of 90 percent in 2010.

(iv) Health System Reform

6.94 Both the overall 11th 5YP and the MOH’s 5 year program called for comprehensive health system reform to make health services more accessible and affordable. An Inter-ministerial Committee for Health Reform was established in 2006, representing 15 relevant ministries with the NDRC Minister and the Minister of Health as co-chairs. Its mandate is to develop a comprehensive health system reform plan.

6.95 The Committee has undertaken a series of activities, including field investigation, themes studies on four major reform areas, repeated internal consultations, and consultations with a wide range of interest groups. In May 2007, 8 institutions including research bodies, universities, and international organizations, including the World Bank, were invited to contribute a reform plan. This process of preparing the health reform plan has set an unprecedented model in China for formulating a major national reform policy.

6.96 The draft plan has been completed and has been endorsed by the State Council. Public consultations are currently underway, which will be followed by revisions and modification. The next step will be a national pilot in selected cities. For this year’s budget, central government has put aside RMB 56 billion to finance the pilot.

6.97 The details of the plan are yet to be published, but the direction and the framework of the reforms have been revealed gradually--indicated in speeches of senior officials and official documents. The overall objective is to establish a “basic health care system” for urban and rural citizens which will provide basic medical care and public health services that are “safe, effective, convenient, and low-priced.” The basic framework comprises a public health system, a medical service delivery system; a drug supply system; and a health protection system that consists of three main health insurance programs-- BMI for the urban formal sector, URBMI for urban residents, the NCMS--plus an MA program to subsidize health care costs for the very poor. From the discussion above, it is clear that the development of this basic framework has already taken place. The framework of the system should be in place by 2010. All the population should then be covered by one the three health insurance programs. The basic health care system should be fully functioning by 2020.

Factors Affecting the Achievement of the Objectives

6.98 During the first two years of the 11th 5YP, significant progress has been made in

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improving the provision of health services. The health protection system was expanded nationwide, the health service delivery system has been strengthened, and improvements have been made in major diseases prevention and control. The remarkable progress can be attributed to the significant commitment of the central government to reform the health services system.

6.99 In the case of the NCMS, at the central level, the State Council established a mechanism to convey joint ministerial meetings for NCMS, which involved 11 ministries or bureaus of the central government and were presided by Vice Premier Madam Wu Yi. At the local level, the progress of NCMS implementation was considered as one of the performance assessment indicators for local government officials. The political stakes were very high; the NCMS was not allowed to fail. Government documents have provided policy assurance and technical guidance for the implementation on the ground.

6.100 Central Government spending on health increased substantially (Table 6.8). For the first time since 1997, the percentage of out of pocket (OOP) expenditure in total health expenditure dropped to under 50 percent (49.3 percent) in 2006 (the OOP rate peaked at 60 percent in 2001.

Table 6. 8 Central Government Health Spending(RMB billion)

Indicator 2005 2006 2007 Increase in 2007 (%)

2008 budget

Central government input on heath

17 63 277 83

Earmarked transfer on Public Health

4.4 8.3 87 12.6

Ear-marked transfer on Public Health

4.3 11.4 167 25.3

Ear-marked transfer on disease prevention and epidemic control,

.06 0.12 100 n.a

Ear-marked transfer on Medical assistance

0.6 1.43 3.34 134 n.a

Source: China’s authorities.

6.101 This effort however would need to be continued or even strengthened. Even though government’s health spending has consistently increased in recent years, it is still low compared with international standards. Including spending on health insurance, China’s government health expenditure in 2006 accounts for only 40.7 percent of total national health expenditure, which is among the lowest in the countries in Figure 6.1.

6.102 In addition, financing of the new health initiatives is largely relying on financial input of the local government, which is difficult for some. China’s current fiscal system is very decentralized. It is challenging for local governments in less developed areas, where health issues are often particularly serious, to have adequate resources to support the new programs. Central government fiscal transfers are supposed to provide assistance to those areas. It would be important to investigate whether the intergovernmental fiscal transfer

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has worked and whether the funds have reached the target population and have been used efficiently. Unfortunately, data is not yet available or accessible for this purpose.

Figure 6.1 Construction of National Total Health Expenditure

0102030405060708090

100

IndiaIndonesia

Philippines

ChinaThailand

Russian

Argentina

KoreaJapan

Germany

France

United Kingdom

Australia

Percent

Government expenditure on health (% of the total)

Private expenditure on health (% of the total )

Source: World Bank’s commissioned background paper on ‘Public Expenditure and Resource Allocation in the Health Sector in China

6.103 Another major challenge is the complexity and fragmentation of the health services and their regulation. In addition to the MOH, dozens of line ministries and bureaus at central level are involved in its provision, administration, and regulation. For instance, 4 basic health protections schemes are managed by 3 different ministries, namely MoLSS, MoH and MoCA; price setting is controlled by the NDRC; personnel is managed by the Ministry of Personnel; and other ministries manage other aspects. This is why the working group on the ongoing health system reform includes representatives of 16 ministries. This structure of administrative responsibilities leads to unnecessary fragmentation and has made it very difficult to introduce any reforms that would trigger changes in responsibilities. To address this problem, calls have been made for the establishment of a National Commission on Health (NCH) which would oversee and coordinate all the health-related ministries. The NCH would replace the current disease specific State Council Task Forces (such as the National Working Committee for Women and Children, State Council AIDS Working Coordination Office, Committee for Patriotic Health and Sanitation Movement). However, these calls have not led to policies.

6.104 Now that many health protection systems and health delivery facilities have been established, it is important to monitor how many people are covered and can make use of the systems and facilities.

6.105 Many of the current insurance schemes largely focus on in patient care. To increase the efficiency of the health system, the government could consider providing stronger incentives for using primary care and preventive care.

Conclusions and Lessons Learned

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6.106 Overall, the general development objectives laid out in the 11 th 5YP are comprehensive and appropriate, aimed well at addressing the major challenges faced by the current health system. There has been significant progress to date, and prospects for achieving the objectives are good.

6.107 The targets set by the government on health protection and major disease prevention is being realized in advance of the schedule. The speed at which the programs are rolled out is very impressive compared to the time it usually takes to set up such nationwide programs in other countries. In a few areas progress is lagging behind. The coverage for DPT and OPV is lagging behind the target of 90 percent population coverage by 2010, and the coverage rate of Iodine Deficiency Control is significantly behind target. Enhanced work is also needed on tobacco control, rural water and sanitation, and birth defect prevention.

6.108 Health protection will need to continue to be a key focus for policymaking. While a rapid expansion of health protection is successfully addressing a key constraint on further improvements in health status and living standards, important issues remain. First, while schemes including the NCMS are significant steps providing health protection to rural areas, the current contribution is small compared to annual health care expenses. Moreover, the experience suggests that the NCMS in some areas leads to increased service charges. The establishment of the MA program is a very important first step in setting up a health safety net for the vulnerable and poor. However, the impact on people’s finances is still limited, although government financing is still increasing.

6.109 Now that China has done a remarkable job in rapidly setting up and rolling out a health protection framework in recent years, in the next stage it is also important to focus on addressing some design issues and further improve the system. Design issues include: the three insurance schemes largely focus on impatient care, which dis-incentivizes the provision of primary and preventive care; the insurance funds run considerable surpluses, which implies room for better and/or more coverage of the insured; and the health system would benefit from less fragmentation, to improve risk pooling and joint management; and there is a need for progress with provider payment reform.

6.110 Possible lessons that could be learned concern the content and the indicators of the plans. First, the plan seems somewhat conservative in setting health related targets; there is room to be more ambitious considering China’s economic development and the fact that, improvements in life expectancy and Infant Mortality Rate reduction, most middle and high income countries in East Asia have seen more progress in outcome indicators than China (Figure 6.2).

6.111 Second, one major challenge in China is formed by the significant disparities in health status and outcomes among different regions. National averages tend to mask the disparities in health outcomes between urban and rural areas, different geographic areas, as well as different groups. For instance, MMR and IMR in rural areas in 2002 were 2.6 and 2.7 times higher that those in urban areas. Disparities in other health outcomes also exist. Targets in the next 11th 5YP on how to narrow down these gaps would be of great

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value, as they can guide efforts to address the challenge of inequity.

6.112 Third, in the key disease related indicators, there is only one indicator on non communicable diseases (NCDs) and it is not clearly defined. Given the fact that more than 81 percent of deaths in China in 2002 are attributed to NCDs, more indicators concerning NCDs would be desirable. As a matter of fact, there currently is no national NCD prevention and control plan, and spending on NCDs has been minimal compared to that for infectious diseases such as HIV/AIDS and TB.

Figure 6.2 Improvements in Life Expectancy and IMR Reduction inthe Asia Pacific Region (1985-2005)

Source: World Bank, World Development Indicators.

6.113 Finally, better health indicators such as Healthy Life Expectancy at Birth rather than Life Expectancy should be considered in measuring the population’s health gains because the indicators cannot fully capture the increasing burden from NCDs and injuries.

6.114 To take the discussion further, a systematic and cross-board monitoring and evaluation system seems to be warranted in assessing such a large scale and comprehensive national develop plan. It appears that while the government has developed many medium and long term initiatives (including for infectious diseases prevention and control, nutrition, and mental health), there has been no attempt at rigorously monitoring and evaluating progress. So far, some of the evaluations that have been done, as for NCMS and HIV/AIDS, tend to be qualitative rather than quantitative, use case studies rather than representative sampling, focus on process rather than outcomes, and focus on achievements rather than on identifying risks and issues. Moving into the second phase of 11th 5YP, it might be the time now to start the building of an evidence based, systematic monitoring and evaluation system.

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C. Education Development

Background and Key Objectives

6.115 Although significant achievements were made during the 10th 5YP period in education, the education system could not fully meet the demands arising from rapid economic and social development with respect to the quantity and quality of labor force. Compared to the group of middle income countries, China lags behind in some key indicators including education input and gross enrollment rate at preprimary, secondary and tertiary levels of education (see Annex 10). The 11th 5YP, therefore, places emphasis on improving education, in line with the guiding principle to improve the capacity for independent innovation and the policy orientation to shift the drivers of economic growth from ‘physical investment’ to ‘science, technical progress and human capital investment’. Through investment in education, the government hopes to turn China’s huge, often low skilled labor force into rich human resources so as to promote more sustainable and higher quality growth.

6.116 The 11th 5YP therefore calls for a wide range of measures aiming at improving access, quality and equity at primary, secondary and tertiary levels, encompassing improvements in management and governance. This is the first time that promoting educational equity is identified as a key objective. The aim is to address the challenge of providing affordable education to disadvantaged groups and regions. Ultimately, more equal provision of education will contribute to the building of a harmonious society.

6.117 The 11th 5YP lays out the five main tasks for educational development:

Universalizing compulsory education (CE) by improving access to CE in rural area, especially for girls, children of minority nationalities, and children from poor families; promoting more equitable development among urban and rural areas, and among regions; and requiring local governments to provide CE to migrant children in urban area.

Promoting vocational education (VE) by expanding the capacity of secondary VE to 8 million new entrants annually, for vocational senior secondary education to reach the same capacity as general senior secondary education; and improving the quality of VE through teaching & learning reform, adopting more apprenticeship programs and school-enterprise linkage programs.

Improving the quality of higher education (HE) by controlling the expansion of capacity; strengthening research, improving teaching and learning methods, and developing key universities and key specialities programs.

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Increasing educational investment by allocating more resources for education with a target of public education expenditure of 4 percent of GDP by 2010; promoting educational equity by increasing transfers from central and provincial governments to rural and poor areas, and middle and west regions; and setting up a student-aid system covering students at all levels.

Deepening educational reform by establishing standards of schooling; supporting private education; regulating school fees; reforming the test, admission and evaluation systems; further reforming the curricula of basic education; and increasing the autonomy of schools.

6.118 The 11th 5YP provides a few indicators for compulsory education, vocational and secondary education, and educational investment. These are supplemented by additional indicators from the 11th 5YP of the Ministry of Education.

Implementation Status of Main Tasks

(i) Documents and Legislation Issued and Reforms and Programs launched in 2006-07

6.119 The central government has been very active in pushing forward education development: many pieces of legislation were adopted and programs and reforms launched (Annex 10). The range of initiatives has been broad, from pre-schooling to higher education, from reforms in teaching & learning to reforms in management and governance. The highlights include universalizing CE through public investment, expanding VE through student aid and upgrading facilities and equipment, improving HE through teaching & learning reform and governance (Table 6.9).

Table 6.9 No. of Documents and Programs Launched in 2006-2007

Category No. of documents/laws/ programs

Content

Compulsory Education (CE)

9 To set up free compulsory educationTo reform teacher management To update legislation

Vocational Education(VE)

7

Higher Education(HE)

10 To award excellent scholars and outstanding research teams;To enhance teaching and learning reform; To set up a quality assurance system

Educational investment 8 To regulate the implementation of free CE, rehabilitation of rural school building, special schools in central and west regions;To regulate the student aid programs at primary and vocational levels

Institutional reform 14 To strengthen the kindergarten management, private institutions;To regulate the implementation of HE teaching reform, vocational education reformTo regulate school fees, Sino-foreign school cooperation

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Source: China’s authorities.(ii) Main Initiatives and Key Results

Compulsory Education (CE)

6.120 Good progress has been made in universalizing nine-year compulsory education in the two years. This was achieved mainly through substantial public spending by government at all levels. Free compulsory education in rural China was implemented in 2006 and gradually extended to urban areas in 2007. By September 2008, free compulsory education should have been achieved nationwide. The targets on access to primary and junior secondary education—on enrollment rates and retention rates—were reached three years ahead of schedule in 2007 (Table 6.10). As a result, the Chinese government declared that one of the targets of Education for All (EFA), namely Two Basics in China—basically universalizing compulsory education and basically reducing adult illiteracy—was achieved in the western region in 2007.

Table 6.10 Key Indicators for Compulsory Education(percent)

Objectives Indicators Target-2010

2006 2007

Capacity expansion and system development (addressing access issue)

Net enrollment rate of primary

>99 99.3 99.5

Gross enrollment rate of junior secondary

>98 97 98

Retention rate of junior secondary

>95 93.8 94.7

Enrollment rate of 3-year pre-school

>55 42.5 44.6

Gross enrollment rate of senior secondary

80 59.8 66

Population coverage rate in the areas where Two Basics has been achieved

>99 98 99

Illiterate rate of cohort aging over 15

2 NA NA

Urban & rural and regional equivalent (addressing equity issue)1. 3 targets for 3 regions2. Basically reached regional equity—all schools reached the benchmarks on facilities and quality

NANA

NANA

Quality improvement (addressing low quality)1. quality of teachers, especially in rural areas, improved 2. teaching & learning reform

NANA

NANA

Source: China’s authorities.

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6.121 Efforts were made to narrow educational disparities between urban and rural areas and among regions. Specifically, the condition of rural schools has been improved through the boarding school program, the school building rehabilitation program, and the distance learning program. Seven thousand boarding schools were constructed in rural areas and RMB 11 billion was invested in the distant learning program to cover 360,000 rural schools. However, without more research on the quality of establishments in urban and rural areas, it’s hard to assess progress toward the objective of regional equity, “all schools reach the benchmarks in terms of facilities and quality.”

6.122 Efforts were also made to improve the quality of teachers in rural area. Various programs such as the Special Post Program, the Educational Masters Program, the Volunteer Program, and the Teacher Rotation Program were introduced to improve teacher training and teacher deployment. Curriculum reform was deepened and extended to senior secondary schools. However, it is difficult to assess the results of these efforts as there are no monitoring targets, timetable, and indicators for these initiatives on quality improvement.

Vocational Education (VE)

6.123 Technical and vocational education and training (TVET) expanded rapidly in the past two years, helped by new initiatives on school infrastructure and student aid. The target of equal enrollment between general secondary and vocational secondary education was reached three years ahead of schedule; the same kind of target for tertiary education was achieved even in 2006 (Table 6.11).

6.124 The initiatives to increase school-industry linkage, apprenticeship, contract training, and part-time program are in the right direction and in line with the international trends in the area of TVET. However, it is difficult to assess the results as there is no data to indicate if the expanded TVET institutions, especially in rural areas, provide better educational service for farmers and agriculture, and for rural to urban migration. Also, there is no data for the initiatives on regional development and quality improvement.

Higher Education (HE)

6.125 Good progress has been made on expanding HE, with the new enrollment of graduates kept stable while the gross enrollment rate of undergraduates kept increasing. By the end of 2007, the gross enrollment rate was 23 percent, higher than the regional average of the East Asia and Pacific region of 20 percent (Table 6.12).

6.126 Many programs and initiatives were put in place to improve the quality and governance of HE. The Ministry of Education completed the first round evaluation of undergraduate studies on 92 universities by the end of 2007 and published the results. Graduate admission reform was conducted. The second phases of 211 Project and 985 Project, which aim at developing key universities and key specialities, were completed.

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6.127 However, there are no data for overall indicators to monitor the progress. And there are also no data or information on the quality improvement programs.

Table 6.11 Key Indicators of Vocational Education

Objectives Indicators Target-2010

2006 2007

Capacity expansion and system development(addressing access issue)

New entrants of :General senior secondary Vocational senior secondary

the same number of

new entrants

8.71 M 597.5 M (46%)

8 M8 M

(planned)

New entrants of General Higher EducationVocational Higher Education

the same number of

new entrants

2.47 M2.93 M(54%)

5.67 M8.61 M

No. of trainees 60 M migrant farmers

got trained

NA NA

Urban & rural and regional equivalent (addressing equity issue)1. 3 targets for 3 regions2. partnership program3. county VET center program 1000

centers

NANANA

NANANA

Quality improvement (addressing low quality)1. improve teacher quality 2. teaching & learning reform: contracting training, apprenticeship etc.3. Model TVET institutions program4. Joint conference-management reform

1000 secondary

100 college

NA NA

Source: 2006 data from Vocational Educational Research; 2007 data from China Education Blue Paper. www.people.com.cn.

6 provinces reached the target; Zhe Jiang and Chongqing had gone beyond the target.

(iii) Educational Investment and Institutional Reform

6.128 The governance of public education service was greatly improved through financing and institutional reforms since 2006. Compulsory education was financed by governments. With 90 percent of students from rural poor families at secondary vocational education was covered by student-aid program, a comprehensive student-aid system ranging from primary to secondary and tertiary levels was established in principle. This helped make progress in improving educational equity and the quality of

59

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the labor force. The educational attainment of cohort over 15 increased to 8.5 years in 2007, close to the target of 9 years. The educational attainment of new entrants into the labor force increased to 10 years.

Table 6.12 Key Indicators of Higher Education

Objectives Indicators Target-2010 2006 2007Capacity expansion and system development (addressing access issue: too rapid expansion for undergraduates)Keep the total/new enrollment stable

Total enrollment Of which general HE No. of undergraduates No. of graduates

30M

20M1.3M

25M

1.1M`

NA

1.1MGross enrollment rate 25% 22% 23%

Quality improvement(addressing low quality)1. Quality assurance system

2. Teaching & learning reform

3. Adjustment of specialities, subjects and school mapping

4. Developing high level universities and key specialties (211 & 985 Projects)

5. Innovation capacity

6. Enhance the social science

No. of world class universities

No. of world class specialities

No. of high quality research results

To assess HEI every 5 yrs; to set up accreditation system

3000 specialities3000 curricula500 model labs100 best faculties To set up and disclose database of teaching To set up and disclose the database of highly needed talents

NA

NA

NA

NA

NA

NA

Source: www.news.xinhuanet.com; MOE documents

Table 6.13 Inputs and Outputs

Objectives Indicators Target-2010 2006 2007 2008Access to Free CE No. of beneficiary Set up student

aid system for poor students

NA 150M Realized

Student aid to secondary VE

No. of beneficiary 90%

Educational attainment Years of cohort over 15

Years of new labor force

Ratio of employees over college level to all labor force

9

11

10%

8.5

10

NA

Source: Government documents of Two Conferences on March, 2008.Educational Investment

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6.129 The financing reform has promoted educational equity through supporting the disadvantaged groups and supporting the priorities of development. In the past two years, governments at all levels, notably the central government, have increased spending on education and have improved the allocation of resources. The ratio of public spending on education to GDP increased from 2.8 percent in 2005 to 3.0 percent in 2006. However, it is below the regional average at 3.5%, and still away from the target of 4% in 2010. In addition to CE, secondary VE and tertiary normal education have benefited from public resources for student aid and subsidy, while the western region, rural areas and minority nationality areas have received significant transfers.

6.130 At the same time, information on initiatives aimed at improving the efficiency and effectiveness of educational spending are not available. These initiatives include: setting up standards of school conditions and cost per student, improving the methods of educational transfer program to motivate better performance, and setting up an M&E system to improve the efficiency and effectiveness of public education financing.

Institutional reform

6.131 The reforms on curricula, test and performance assessment, and admission for higher level schools have been significant in the past two years. In particular, pilots were carried out for entrance examinations and admissions to higher education, and standardized assessment for student performance in some selected cities.

6.132 In contrast, little progress has been made with the reform of school management, in areas such as greater school autonomy, and personnel and pay management. Private education is another area that deserves more attention and government action in the next few years. In addition to directly providing education, the government could provide supervision and procure educational services from private institutions so as to promote and regulate the education and training market development.

Conclusions

(i) Key Results

6.133 Significant progress has been made in the priority areas of education development identified by the 11th 5YP, namely compulsory and secondary education, while the implementation of other tasks is on the right track. May new policies, regulations and programs were launched. Strong political commitment and support for education by society at large have reinforced the push for education development. The target of free compulsory education nationwide will be achieved ahead of schedule, as well as the targets for capacity expansion of VE and HE. Although it is difficult to assess the progress made so far to improve the quality of the education system, it is clear that many initiatives have been launched.

6.134 The provision of public education has also been made more equitable. A public

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financing system has been established to meet the educational needs of disadvantaged groups, and urban-rural and regional disparities were narrowed to some extent. These are important milestones for Chinese education development.

(ii) Main challenges

6.135 Compared to capacity expansion and system development, regional development and quality improvement are the weak parts of overall reform. The quality of education needs to be improved in many areas; the quality of rural education continues to lag that in urban areas; education expenditures are still low compared to the target and international benchmarks; and institutional reforms need to be further explored.

6.136 A lack of policy research contributes to these weaknesses. Some key research projects planned earlier on unit cost and benchmark of schooling, and some fundamental work including setting up databases and updating teacher qualifications, have not yet started. This kind of key policy research and fundamental work is essential to achieve quality improvement. Other basic work, like updating curricula and teaching methods, professional development for teachers and school management require long term efforts.

6.137 There is no systematic M&E system in place for all initiatives and tasks. Therefore, there is a lack of adequate data to monitor and assess progress in many programs and reforms. This will hinder policy adjustment at later stages of implementation of the 5YP. The current educational statistics system can not provide timely and validated data and some comparable indicators.

(iii) Recommendations

Policy-making in the 5YP

6.138 The 11th education 5YP addressed the important issues of access, equity and quality which are highly relevant to the current situation. The 5YP sets the right policy directions for human capital development, and comprehensive reforms and programs have been launched. However, from the implementation perspective, it would be useful if future Plans have a clear timetable, and if the monitoring and evaluation is more result-based and evidence-based.

Implementation of the 5YP

6.139 It is necessary to put more effort and resources in policy research and in setting up a monitoring and evaluation (M&E) system. This would allow for timely adjustment of policy based on developments, and would provide a more solid base for future policy making. A comparing with international benchmarks suggests that the educational statistics system needs to shift emphasis from input to output indicators like completion rates; and to focus on outcome and efficiency indicators such as indicators on youth literacy rates and student performance.6.140 During the rest of 11th 5YP period, the following areas need more attention and

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effort:

As the 9-year compulsory education target has been achieved, early child development (ECD) will be a key area for consolidating and improving the quality of CE. A new law on ECD should have high priority in the next few years.

Moving forward in the right direction, post secondary education could usefully become more demand-driven. In areas including teaching & learning, school administration, tests and evaluation, there is room for closer links with the labor market, responding to the demand of local economic growth and social development.

Public-private partnership needs to be strengthened, in particular in the areas of VE and HE. This area needs not only legislative and regulatory work, but also local active pilots and practices. It would be helpful to learn from best practices at home and abroad.

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7. Building a Resource Efficient and Environmentally Friendly Society

7.1 This chapter evaluates the progress to date towards meeting the 11th 5YP’s objectives in building a resource efficient and environmentally friendly society. Specifically, this chapter focuses on two of the nine major objectives of the 11th 5YP:

Objective 3: Significantly increase resource use efficiency in the area of water; and Objective 6: Enhance sustainable development.

7.2 The evaluation identifies the main initiatives intended to support these objectives, assesses the key results at the midterm of the plan period, discusses emerging issues from the implementation of the 11th 5YP, and derives some preliminary conclusions and lessons in relation to the consistency and guidance content of the 5YP. The assessment is based on a review of the publicly available monitoring information (as of June 2008) and structured interviews with selected officials and academic experts in China.

In broad alignment with the sectoral structure of the economy and the Government, this chapter is organized as follows: The first section focuses on initiatives to reduce air, water and solid waste pollution. The second section discusses efforts to reduce the intensity of water use and protect water resources. The third section covers programs to increase the forest cover and stop ecological/environmental deterioration. The foruth section summarizes the cross-cutting conclusions and lessons that emerge.60

Reducing Air, Water and Solid Waste Pollution

(i) Background and Trends

7.3 China’s rapid economic growth over the past three decades has been accompanied by major increases in environmental pollution that have reached alarming levels in many areas. With regard to air pollution, China accounts for 13 of the world’s 20 most polluted cities in terms of SO2 pollution, as shown in Figure 7.1. With respect to water pollution, in 2007, of all 407 monitored river sections, 49.9 percent met the Grade I-II surface water quality standard (that is, water that is safe for human consumption after treatment), 26.5 percent met Grade IV-V standards (that is, safe for industrial and irrigation use), and 23.6 percent failed to meet Grade V (that is, unsafe for any use). Overall, current COD discharges from point sources reached 13.8 million tons in 2007, nearly 40 percent above the ecological carrying capacity of China’s rivers of about 10 million tons/year, based on their assigned environmental function zoning.

Figure 7.1 SO2 Emissions - 20 Most Polluted Cities

60 Farmland retention, increasing energy and mineral resource efficiency, and control of greenhouse gas emissions are being covered in other chapters.

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7.4 To guide national efforts for pollution control, the 9th, 10th and 11th 5YPs selected total SO2 and COD discharges as the key indicators for air and water pollution respectively. This is on the basis of their representativity, feasibility for monitoring, data accessibility and availability, and practicality in measuring progress in implementation. In spite of this attention, SO2 and COD emissions have continued to rise over the past ten years, as shown in Figures 7.2 and 7.3. For the 11 th 5YP the reduction of SO2 and COD emissions by 10 percent has been identified as one of only eight “obligatory” targets, an indication of their paramount importance for the entire sustainable development strategy.

7.5 China’s rapid growth and urbanization has also been associated with mounting quantities of solid waste, from both industrial and residential sources. In recognition of the need for national efforts to address this issue, the 11 th 5YP identifies the “comprehensive (re)utilization of industrial solid wastes” as the key indicator of progress in this area. Recent trends of this indicator are shown in Figure 7.4.

(ii) Main Initiatives

7.6 The main initiatives undertaken to reduce air, water and solid waste pollution can be broadly categorized as administrative measures, policy measures and investment promotion:

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Figure 7.2 Monitored COD Discharge in China Figure 7.3 SO2 Emission in China

0

200

400

600800

1000

1200

1400

1600

2002 2003 2004 2005 2006 2007

Industry

Residential

Total COD

COD (10,000 tons)

Source: China’s authorities. Source: China’s authorities.

Administrative Measures:

7.7 The main instrument for pursuing this strategy are the existing pollution control regulations which include: 1) the requirement for environmental impact assessment and approval by the Ministry of Environment Protection (MEP) prior to any investment; 2) pollution load planning through total mass control, by issuing discharge load permits to polluters, levying discharge fees for emissions exceeding the standard, and mandatory clean-up within a given time limit or compulsory closure.61

Source: China’s authorities.

7.8 These instruments are mainly aimed at: (i) restricting the approval of new investments and expansion of existing plants in highly polluting and resources intensive industries in regions and river basin that have not met the reduction targets in the past and at present; and (ii) closing down or phasing out existing plants that cannot be made to meet pollution standards within a certain time.62

7.9 For the 11th 5YP period, the most important new initiative has been to strengthen 61 Total mass control refers to the regulation of pollution discharges that takes the environmental function and carrying capacity of the receiving water body into account. It is more comprehensive than the previous concentration-based approach that focused on meeting discharge standards without considering the environmental function of the receiving water body or airshed. 62 Every summer since 2005, MEP/SEPA, together with other agencies, has undertaken a major campaign to inspect pollution discharging enterprises and sanction illegal discharges. In the 2007 campaign, 1162 enterprises were found to be in violation of relevant laws, of which 400 were closed down, 249 were temporarily closed until the violation is corrected, and 102 were given a deadline for compliance. Source: SEPA news release, 2007-09-03.

Figure 7.4 Comprehensive Utilization of Industrial Solid Waste in China (%)

0

10

20

30

40

50

60

70

1999 2001 2003 2005 2007

Utilization

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the enforcement of the above pollution control instruments by linking the pollution monitoring indicator to the local government performance appraisal system. The central government, MEP on behalf of the State Council, has signed “responsibility agreements” with all provincial governments to make them accountable for meeting the pollution reduction targets, i.e., they are “obligatory”. For localities that fail to meet the agreed environmental targets, the head of the government and other responsible officials will not be rewarded and promoted (even demoted in serious cases) even if performance in all other aspects meet the criteria for reward and promotion.

7.10 A second major initiative for the 11th 5YP has been the promotion of the “circular economy”. At the core of this concept is an effort to increase materials use efficiency and minimize waste streams by: (i) reducing the use of raw material inputs (including natural resources, water, energy), (ii) recycling these materials within the same industrial process or plant, and (iii) recovering these materials from the waste stream and reusing them in the same or other processes. The circular economy is mainly being pursued through the gradual establishment of performance standards for recycling and reuse (such as for raw materials, water intensity and solid waste utilization), and promotional incentives for more resource efficient technologies and eco-industrial parks.

Policy measures:

7.11 The 11th 5YP period has witnessed the accelerated discussion, piloting and implementation of economic instruments in environmental management. Advances are being made in seven areas:

Fees and pricing: The existing pollution discharge fee system is being strengthened, mainly by raising the fees (e.g. a prospective doubling of the present 0.63 yuan/kg SO2 discharge fee) and improving fee collection. The guaranteed feed-in tariff for electricity generated from renewable energy sources and waste incineration has been fully implemented.

Ecological compensation: Rules for the compensation and limitation of ecological damage from mining operations (including a ban on the felling of forests) have been issued and implemented.

Green credit: MEP has issued a list of companies non-compliant with environmental regulations and industries to major banks and the China Banking Supervision Commission. The banks can limit their lending risk by restricting loans to these companies and industries. In addition, all companies listed in the stock market need prior audit by SEPA. Though still in pilot, 38 companies were audited in 2007 with 14 of them failing to pass.

Green trade policy: In 2007, China removed the VAT rebate on exports of some pollution and resource intensive products, and imposed export taxes on exports of products including some iron and steel products. MEP and the Ministry of Commerce have been discussing the option of making the award

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of export/import licenses contingent upon the relevant companies’ compliance with environmental regulations.

Environmental liability insurance: Triggered by frequent pollution accidents and eco-disasters in recent years, the insurance is mainly to compensate the victims of damage.

Environmental taxes: MOF, the State Agency for Taxation (SAT) and MEP have been studying options for environmental taxes.

Emissions trading: MEP has been piloting SO2 emission trading among power plants and has plans to begin piloting COD emissions trading.

Investment promotion:

7.12 The 11th 5YP also provides for a substantial increase in funding for investments in pollution control:

For COD reduction: The specific target is to increase the urban sewage treatment rate from 52 percent in 2005 to 70 percent in 2010 by building and operating more waste water treatment plants (WWTP) in urban areas. Funding is mainly from the central government, subject to approval by the NDRC, with counterpart funding from the local government.

For SO2 control: Mainly through desulphurization at the major polluters particularly coal-fired power plants. By 2007, about 40 percent of total power plant capacity had desulphurization installed and in operation.

(iii) Initial Results

7.13 As summarized on Table 7.1 the 2006 monitoring results were mixed, showing an increase in the urban sewage treatment rates and industrial solid waste utilization, combined with increases in SO2 and COD emissions. However, MEP’s most recent Report on the Environment Status of China, indicates that total COD and SO2 emission in 2007 have decreased by 3.1 percent and 4.7 percent respectively.63 On this basis, it would appear that the long-standing upward trend of both SO2 and COD emissions has finally been brought under control, which represents a major accomplishment.

7.14 The data on industrial solid waste utilization (Table 7.2) are difficult to interpret since (i) in 2005, the figure for waste discharged exceeds that for waste generated, and (ii) the 2006 figure for waste utilization already exceeds the target for 2010. If the latter figure is correct, this suggests that the target may have been set too low.

Table 7.1 The 11th 5YP Targets and Progress Related to Pollution Reduction

63 2007 Report on the Environment Status in China, MEP, June 2008

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National targets Breakdown to sectoral targets

2005 actual

2006 actual

2007 actual

2010 target

Govt. agency in charge

Reduce total emission Of major pollutants By 10 percent (obligatory)

Total COD (10,000 tn):Industry:Residential:

1414555860

1428542887

1383 1270 MEP

Urban sewage treatment rate (%)

52 57 60 70 MEP, cities for WWTPs

Total SO2 (10000t):Industry:Residential:

25492168381

25892235354

2468 2295 MEP

Cities with level II air quality among 113 key cities (%)

70 NA NA 75 MEP

Utilization of industrial solid wastes (indicative)

Comprehensive utilization rate 1/ (%)

56 61.2 62.8 60 NDRC Dept. resource cons., MEP

Sources: The 11th 5YP for environmental protection, MEP, 2006; 2007 Report on the Environment Status in China, MEP, June 2008; 2006 Report on the Environmental Status in China, SEPA, June 2007; China Statistical Yearbook, 2007.1/ In China, solid waste utilization includes off-site material recycling and reuse, and recovery of energy content through e.g. incineration.

Table 7.2 Target and Progress Regarding Industrial Solid Wastes (billion tons)

2005 actual

2006 actual

2007 actual

2010 target

Remarks

A. Industrial wastes generated

1.35 1.52 1.76

B. Industrial wastesDischarged

1.65 1.30 1.20 In 2005, waste discharged

exceeded generated

C. Indus. wastesUtilized

0.75 0.93 1.11

Utilization rate (=C/A) (%)

56 61.2 62.8 60 2006 already exceeded target

of 2010Sources: 2007 Report on the Environment Status in China, MEP, June 2008, 2006 Report on the Environmental Status in China, SEPA, June 2007.

(iv) Preliminary Assessment

Analysis of Results:

7.15 While it is still too early to determine the contribution of each of the various initiatives to the reduction in pollution emissions, some experts believe that the biggest impact might have been that of administrative measures on SO2 reduction. The following measures are reported to have had a major effect:

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The requirement that all new power plants have desulphurization as prerequisite for approval;

The compulsory closure of old power plants with capacity smaller than 200 MW.

The premium tariff for electricity generated from power plants that meet the desulphurization requirement. The 0.015 RMB/kwh premium added to the applicable feed-in tariff roughly covers the cost of desulphurization and removes a disincentive to operate the desulphurization equipment which existed in the past.

7.16 For water pollution, the COD that is monitored is predominantly from residential sources, which account for about 60 percent of the total. While recent massive investments in new urban waste water treatment plants WWTPs have succeeded in reducing total emissions in 2007, the achievement of the 2010 pollution reduction targets cannot be taken for granted. The achievement of the target to reduce pollution by 10 percent by 2010 from the 2005 baseline will actually require reductions of about 40 percent of the COD and SO2 emissions (from a hypothetical 2010 “business as usual” scenario), once incremental emissions due to growth in economic activity are taken into account.64 This is equivalent to COD reduction of around 5.6 million tons per year (TPY) over 5 years. Major engineering projects are expected to bring about 4 million TPY of COD reduction of which 3 million TPY will be through additional urban WWTP capacity, and 1 million TPY by industry. The remaining 1.6 million TPY of COD is to be eliminated through structural change and other means. This is expected to be difficult, since—under China’s current growth pattern—the fastest growing industrial sectors are also the most polluting ones, such as cement kilns, iron & steel, metal smelters, chemicals, pulp & paper, and coal fired power plants.

Emerging Issues

Financial burden of local counterpart funding: End-of-pipe methods, especially WWTPs, mainly funded from the central government, continue to play a key role in cutting down COD emissions in China. On the other hand, the most frequently cited obstacle for the lack of achievement of pollution reduction targets in the 9th and 10th 5YP is the inadequacy of funding, especially that of counterpart funding from the local governments for their share of the WWTPs, sewerage collector networks and other investments required to reduce COD discharges from urban sector. This points to the desirability of increasing reliance on market-based approaches, such as the creation of a regulatory framework that will enable wastewater treatment plants and sewerage networks to not only recover operating and maintenance

64 Absent a major pollution control effort, i.e., in a “business as usual” scenario, China’s rapid economic growth would be expected to increase pollution discharges by about 30% by 2010. Thus, to reduce total discharges by 10% from the 2005 baseline will actually require reductions of about 40% from the “business as usual” trend line for 2010.

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costs, but also earn a rate of return that will help finance their expansion and attract investors.

Administrative burden of the current administrative approach: While our discussions with sectoral experts concluded that administrative measures and investment in end-of-pipe technical solutions have been effective in reducing pollution discharges, there is a concern about the sustainability of such administrative approaches in the face of growing indications of fatigue among local governments. It is quite possible that in the long run the ability of the central government to pressure local governments on pollution control will erode as power becomes more decentralized and other priorities emerge. A more sustainable approach for the long term would be to establish a policy framework that will provide the incentives needed for the economic and industrial structure to evolve towards higher resource efficiency and lower pollution, and create an environment that encourages production modes and behavior that are more conducive to sustainable development. Such a mechanism should nonetheless be based on regulations and standards, strengthened law enforcement, reliable data monitoring and gathering, and more active application of market-based economic instruments.

Gaps in the monitoring framework: Our limited research for this study provided some indications of weaknesses in the monitoring framework. We understand that great efforts are already under way to remedy the inadequacies of data availability. There are, however, important gaps in the monitoring framework that deserve to be mentioned:

(i) The COD monitoring only covers discharges from point sources, and not from non-point pollution (NPP) which has been left out due to technical difficulties in measuring, monitoring and controlling. Since NPP, mostly from fertilizer and pesticides runoff, as well as livestock waste, may account for between a third to two thirds of total COD discharges, this is a major gap in both the monitoring and the planning framework that needs to be addressed if the notable achievement in pollution reduction are not to be undermined. A similar gap occurs in relation to NPP from vehicles, which accounts for a rapidly growing share of air pollution.

(ii) The monitoring of air pollution has focused on SO2 discharges, which was an appropriate target for the early stages, since it is relative straightforward to monitor and control. However, recent advances in our understanding of the impacts of pollution have pointed to the much greater health and economic impacts of particulate matter pollution, especially particles smaller that 2.5 microns in diameter (PM2.5) for which emissions are rapidly growing in tandem with China’s vehicle fleet. For the long term,

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therefore, particulate pollution or, even better, a comprehensive indicator such as the share of cities meeting the official Level II air quality standards, deserve greater attention for the monitoring process and “responsibility agreements”.

Water Resources Efficiency and Safety

(i) Background and Trends

7.17 China’s per capita availability of natural freshwater resources was 2,151 m³ in 2005, which is expected to decline to 1,750 m³ as its population rises to a projected peak of 1.6 billion by 2030. Based on standard definitions, Northern China is already a water-scarce region, and China as a whole will soon join the group of water-stressed countries. Specifically, about 400 of China’s 660 cities are reportedly short of water; and 108 of these cities, including mega-cities such as Beijing and Tianjin, are facing serious water shortages. Given that agriculture and industry accounts for 65 percent and 24 percent of China’s total water consumption, respectively, the 11th 5YP identifies irrigation water use efficiency,, the productivity of water in the industrial sector, and the provision of safe drinking water for the rural population as the key indicators to monitor the effectiveness of the water conservation efforts. As shown in (Table 7.3), the productivity of water in the industrial sector has been increasing rapidly over the past decade. Improving the efficiency of irrigation water use has been more difficult.

Table 7.3 Water Use Per Unit of Industrial Value-Added(M3 per RMB 10,000 in constant prices of 2000)

Year 2000 2001 2002 2003 2004 2005 2006268 269.9 240.8 224.4 205.8 na 178

Source: China’s authorities.

(ii) Main Initiatives

7.18 The main initiatives undertaken to raise the efficiency of water use and extend safe water supply in rural areas have been as follows:

Administrative measures to regulate water withdrawals: To control excessive freshwater withdrawals, planning and zoning regulations are being revised to ensure that industrial development is consistent with available water resources. Since 2002, the issuance of a water use permit has become a prerequisite for the approval of any new investment projects. The issuance of these permits is subject to verification of availability of sustainable water supplies, and the meeting of performance standards with regard to water use efficiency and discharge of effluents.

Economic instruments: Regulations governing the water resource fee and water prices are being revised to enable a better signaling of the economic cost of water:

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(i) The water resource fee is based on the cost of the raw water supply infrastructure. While it has been gradually raised, it is only charged to urban residential, commercial and industrial users, and agricultural users that receive water from a public supply infrastructure such as a pipeline or an irrigation canal. It is not charged to users that obtain water directly from a surface or underground source.

(ii) Water tariffs for residential, commercial and industrial users have been gradually raised since the early 1990s as a result of the implementation of the policy that they fully reflect “cost recovery, reasonable profit, water conservation and social equity.”

Investment promotion: Financial incentives have been provided to local governments and enterprises to promote technologies that do not increase the pressure on natural water resources, such as water recycling and seawater desalination, and to repair and upgrade municipal water supply pipeline and irrigation system to reduce leakage and losses. A major investment program is aimed at providing safe water supply to 160 million rural inhabitants through engineering projects such as repairing the reservoirs in danger, digging deep wells, building and strengthening water supply pipelines.

(iii) Initial Results and Assessment

Analysis of Results:

7.19 Based on the limited available information on the key monitoring indicators, shown on Table 7.4, the water-related targets are on track to be met. The following factors have been identified as contributing to the success so far:

Policy reform and economic instruments have played pivotal role. The water resources fee has been levied heavily on industries, providing a strong incentive for water saving by making it financially attractive to invest in more efficient equipment, and stimulating water recycling and reuse.

By contrast, virtually no fee has been charged for irrigation water users except in a few areas, mostly in the plains, where irrigation water is supplied from infrastructure (canals) that facilitate the collection of fees. This may explain the slower progress in irrigation efficiency than that in industrial water use. A World Bank irrigation water saving project in Hebei province has piloted a scheme “to collect the fee based on water consumption, and to refund it based on farm size”.65 This is reported to have been very effective in stimulating the

65按方收费 , 按亩补偿

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adoption of water saving techniques compared to the traditional approach of charging the water fee based on farm size alone.

Institutional reforms to consolidate the management of water resources in the local Water Affairs Bureaus have helped improve water management and raise irrigation efficiency at the district level, although continued progress in this area will be difficult unless some sort of water fee or price can be charged to irrigation users.

Continued progress in enhancing the sustainability of water resource management will be difficult to achieve because of growing water pollution and the difficulties of coordinating pollution control and water resource management activities, which are the responsibility of separate agencies.

Table 7.4 The 11th 5YP Targets and Progress Related to Water Resources

Item Breakdown 2005 2006 2007 2010 target

Govt. agency in charge

Reduce Industrial water consumption

per unit of industrial added value (m3/10000 yuan) (obligatory)

169m3 -7.7 percent

NA <115 m3 (-30% in 5 years )

NDRC

Industry water recycling rate (%)

75 NA NA None

Irrigation efficiency

0.45 0.46 NA 0.50 MWR, MOAgr.

City water efficiency

Leakage from water distribution pipelines (%)

20 NA NA <15%

Source: The water resources 11th 5-year plan, NDRC, MWR and MoC, May 2007; The 11th 5YP for building water saving society, NDRC, MWR and Ministry of Construction (MoC), Dec. 2006; Interviews with officials of Ministry of Water Resources (MWR); Data for 2007 will be released in late 2008.

Emerging Issues:

Financial burden: The timely availability of funding from both central and local sources was cited as the most important challenge for meeting the 11 th

5YP targets. The problem was most serious in relation to counterpart funding from local governments in the poorer areas. The main exception is the program to extend safe water supplies to rural areas, which benefited from earmarked funding for the repair of unsafe small and mid-sized reservoirs. The emergence of this issue points to the desirability of reducing dependence on the central budget by continuing to raise water resource fees and water prices so as to fully recover the cost of water supply.

Challenges in institutional coordination: Since water resource management and water pollution control are the responsibility of different agencies, it is difficult to develop and implement an integrated water resource management strategy. Lack of coordination and cooperation between water resource

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management and pollution control authorities has aggravated an already serious water scarcity and pollution situation. Better ways need to be found to improve coordination between the management of water flows and the control of pollution discharges. This is necessary to optimize the management of China’s scarce water resources and meet growing water demands of the economy in a sustainable way.

Gaps in monitoring and planning : Efficiency and productivity indicators are appropriate intermediate outcome indicators for improving water resource management. For the long term, however, it would be more important to focus on the sustainability with which the water resources are being managed. This is a major concern, since excessive underground water withdrawals do not appear to be covered under current monitoring arrangements. These withdrawals are causing substantial damage to underground reservoirs, ground subsidence in many urban areas, intrusion of seawater, and drying up of lakes and wetlands, that is largely irreversible and totally unsustainable. Excessive surface water withdrawals are also causing substantial losses of the ecological value and environmental functions of rivers. On this basis, the excess of water withdrawals above sustainable levels from both surface and underground resources would be a more appropriate indicator.

Forestry and Eco-system Protection

(i) Background and Trends

7.20 Forests cover 163.5 million hectares in China, up from less than 115.3 million hectares in the 1980s (see Figure 7.5). They provide China 40 percent of the country's rural energy and about two-thirds of industrial wood consumption (around 225 million cubic meters out of total utilization of around 310 million cubic meters). Although the sector supplies about three percent of employment and four percent of GNP, the forest resource base in China is small and isolated. Forest cover amounts to only 0.11 hectare per capita, significantly below the world average of 0.77 hectare per capita. Wood consumption per capita is only around 0.2 cubic meters per year, making China one of the lowest per capita consumers of wood worldwide. While rapidly growing segments of wood demand include pulp and paper, a large share of China’s rapidly growing wood imports are accounted for by exports of wood content in manufacturing and packaging.

7.21 Like many countries, China experienced a long period of deforestation. Forest cover declined to less than twelve percent and has now risen to over 18 percent. (ii) Main Initiatives

7.22 The main target for forestry in the 11th 5YP is to increase forest coverage from 18 percent to 20

Figure 7.5 Forest Coverage in China

020406080

100120140160180200

1975 1980 1985 1990 1995 2000

Percentage (%)

Source: China’s authorities.

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percent and reverse land degradation and desertification. Three types of measures have been undertaken in support of such goals: key national investment programs, policy reforms and societal participation.

Investment programs:

7.23 The 11th 5YP period has witnessed continuing increases in funding for the key investment programs to restore and increase China’s forest cover. Since the main focus is to protect and enhance forest ecological functions, and in line with the public goods nature of these functions, the main source of funding has been the central government, which plans to allocate about RMB 700 billion for these programs over the period of 2000-2010, with counterpart funding required from local governments:

Establishment and improvement of natural reserves and natural habitats. A major focus is the protection of drinking water source areas, including river sources, water catchments and reservoir ecosystems, and wetlands.

Forestry industry development. With the aim to boost production of fast growing trees, bamboos and bushes to provide raw materials for timber industry, paper industry as well as fuel wood and bio-energy development.

Control of dust sources surrounding Beijing and Tianjin. Mainly through afforestation and reforestation in 75 counties to the north of these two mega cities in order to curb the sand storms affecting the capital area.

Building protective forest belts. Planting trees, bushes and grass cover along the northern frontier of encroaching deserts (the “Three-North”: northeast, mid-north and northwest of China), along the Yangzi river and the coastline.

Protection of natural forests through forest closure, logging ban and reforestation. This program doesn’t contribute significantly to forest coverage target, as the amount of planting involved is relatively small (total 1.9 million ha planned).

Conversion of marginal farmland to forest. This program focused on farmland on slopes steeper than 25º and severely eroded and degraded farmland. In total 8.7 million ha of farmland had been converted by the time this program was basically completed in 2005.

Policy reform and economic instruments:

Forest tenure reform is at the center of sectoral policy reform and is regarded as the key to mobilize resources for forestation, and more importantly, to sustain the result already accomplished. The core of this reform is to clarify responsibility and benefit sharing of forestation among the state, community and farmers;

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Forest eco-benefit compensation has been piloted since 2004. The annual compensation for maintaining forests was 5 yuan/mu, soon deemed too low to provide enough incentive. The compensation was raised in 2006 (to 20 yuan/mu in some southern provinces like Guangdong and Zhejiang) but this has not yet been implemented due to a lack of funding.

Social participation in reforestation : China has had the tradition of voluntary tree planting for decades, which was codified by law in 1980s. Civil society is encouraged to plant trees and provided with facilities each year. Government agencies at different level in different sectors are also required to plant trees.. For example, transportation authorities need to plant a protective tree belt along railway lines and highways.

(iii) Initial Results and Assessment

7.24 Both officials and experts believed that, provided timely funding from both central and local governments is available, China is on track to meet the forest cover target. However the 2008 winter storm disaster in the south damaged a forest area equivalent to nearly 10 percent of the country’s forest cover. Experts are still in the process of evaluating the damage and plans for recovery so as to also determine whether the 20 percent target needs to be adjusted due to this force majeure event.

Emerging Issues:

Financial burden: Availability of funding was cited as one of the major obstacles to achieving the targets of increasing the forest cover and controlling land degradation and desertification. The risk of a shortfall was greatest where land degradation and desertification are most prevalent, since they are the poorest regions of China, with a shortage of both counterpart funding and capacity for the implementation of the integrated agriculture, water resource management, forestry and livelihood development programs needed to combat degradation and desertification.

Problems with monoculture and seedling quality: The huge extent of the 2008 winter storm damage exposed the quality problem of China’s forestation effort. Worst hit were the young and middle aged trees which cover about 70 percent of reforested areas. Due to poor seedling quality and inadequate post-planting maintenance, the trees had grown more slowly and were thus weaker and less resilient than if standards had been maintained. The extensive damage suffered by bamboo forests also illustrates the risks associated with monoculture plantations, since mixed forests could have been expected to better withstand the severity of snow and ice damage.

Lack of post-planting maintenance and funding: If evergreen and deciduous species are planted together, deciduous species would have difficulty surviving. Therefore it is necessary to plant them later in conjunction with

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selective felling of conifers, which the forest farms and local farmers often cannot afford. Government funding and subsidies have been channeled only to planting, with very little funding of ex-ante and ex-post activities that are crucial for survival rate and forest quality. In addition, a low level of funding for R&D has resulted in poor quality of breeding and seedlings.

Need for quality indicators: The use of a quantitative indicator for the 11th5YP and other plans appears to have contributed to the overemphasis of coverage at the expense of forest quality, as illustrated in the following examples:

(i) In the arid and degraded areas where it would be more appropriate to plant a combination of trees, shrubs and grasses of indigenous or drought resistant species, local officials tend to plant fast growing species like poplar for the sake of easier and more tangible achievement within their term in office. This resulted in earlier plantations in the Three-North forest belt dominated by water consuming poplar, which has lowered the groundwater table and out-competed the native vegetation, weakening the resilience of an already fragile eco-system;

(ii) Digging a small hole to plant a tree has better survival rate, can save cost and time, and is more desirable for eco-system protection than clearing the whole land of its original vegetation. But sometimes local forestry teams choose the latter because its result is more visible and straightforward to the eyes of senior officials and laymen politicians in legislature who decide on funding.

(iii) Special issues and technical problems in restoring vegetation cover for degraded land in the arid and semi-arid northern regions remain unresolved, in particular regarding the choice of appropriate species and ex-post maintenance.

7.25 A 2003 strategic study of sustainable forest ecology development in China, organized by the State Council and involving over 300 experts, concluded that considering population growth and sustainable economic development within the eco-capacity of China’s environment, forest coverage has to reach 23 percent by 2020 and 26 percent by 2050. For 2010, a target of 20 percent was deemed as both necessary and feasible. Nonetheless, given that both ecological and economic functions of forests depend at least as much on its quality as on its coverage, improving forest quality deserves more attention and effort, especially for the planted forests since they constitute majority of coverage increase in China.

Conclusions and Lessons

(i) Status of implementation

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7.26 Preliminary indications are that, based on the publicly available information, China has made substantial progress towards the construction of a resource efficient and environmentally friendly society. Over the past two years, the unrelenting increase in air and water pollution discharges over the past decade appears to have been finally reversed. The comprehensive utilization rate of industrial solid waste has been raised. The efficiency of water use in irrigation, and the industrial value added per unit of water consumed, have both increased. The forest cover has steadily expanded over the past decade, although it is possible that the recent winter storm disaster may have set back the timetable for reaching the 20 percent coverage target. These are major accomplishments which inspire confidence that, provided the efforts are continued, the major relevant targets of the 11th 5YP can be achieved.

7.27 Our assessment of the results, based on a review of the available information and informal discussions with selected government officials and experts, have yielded a few useful conclusions and lessons for improving the guidance content of the 11th 5Y plan, especially in relation to the quality and sustainability of development.

(ii) Enhancing the Quality of Development

7.28 It is evident that the 11th 5YP’s use of a small number of key monitoring indicators, and especially the identification of eight “obligatory” indicators and their integration into the appraisal system for local governments, has been a major factor in the remarkable progress to date towards the achievement of the major targets. It appears, however, that the high visibility and priority given to these indicators has led to inadequate attention to qualitative aspects that can worsen the existing tendency to pursue quantity rather than quality. If unchecked, such tendency may undermine the government’s endeavor in steering the development toward ‘good and (then) fast’.

7.29 Pollution in China has well exceeded the carrying-capacity of its water and air. A reduction of 10% by 2010 is far from adequate but is an important first step. The reduction of SO2 discharge, for example, will make an important contribution towards the reduction of air pollution. From the perspective of improving air quality for the long term, however, a more comprehensive indicator, such as the MEP’s Class II National Ambient Air Quality Standard, would be more desirable. The use of such a more comprehensive indicator would put more attention to the control of particulate matter, which has a greater impact on public health than SO2 and is becoming the top air pollutant in most major cities. It would also draw more attention to pollution sources outside of the power and industrial sector, such as transport and urban construction that are not covered by the SO2 indicator.

7.30 The reduction of COD discharge is a major step towards the improvement of ambient water quality. But the focus on urban and industrial sources may have contributed to the lack of attention to other major sources of water pollution in China, namely non-point pollutions from agriculture that, while more difficult to measure, are essential to achieve the desired objective. In line with the objective of enhancing environmental sustainability, a more relevant indicator of the desired impact for the long

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term would be the extent of compliance with applicable water quality standards, in line with the MEP’s applicable environmental water zoning regulations.

7.31 Water Sustainability: Increasing the efficiency of irrigation water use and of the productivity of industrial water use are essential for making water resource management more sustainable. But a more direct indicator of sustainability would simply be the extent to which freshwater withdrawals exceed sustainable limits for both surface and underground water resources. The inclusion of underground withdrawals into the monitoring framework is particularly important as that is where unsustainable practices are most serious and irreversible.

7.32 Forest Quality: Both the ecological and economic functions of the forests will depend at least as much on increasing its quality as on increasing its coverage. Although indicators on forest quality have been included in the sector 11th 5-year plan for forestry, it would better serve the objective of enhancing the sustainability of development to highlight the importance of quality also in the national 5-year plan in future.

7.33 Institutional Cooperation: The adoption of more quality-based comprehensive indicators of final impacts should also provide an incentive for the development of integrated approaches to enhancing sustainable development and improve cooperation between relevant agencies. Thus, for example, the improvement of water resource quality will be most efficiently achieved through the integrated management of water resource management and pollution control, which are the responsibility of separate agencies that need to work together better. Similarly, a greater focus on the ecological and environmental quality of forests should serve to foster better integration in efforts to combat land degradation and desertification with other agricultural and livelihood development agencies.

7.34 Lesson: The 11th 5YP’s use of indicators has been effective in focusing the attention of government officials at all levels on a few key outcomes, thus increasing the likelihood that they will be achieved. Indications are, however, that the high visibility and priority given to these quantitative outcomes has led to inadequate attention being given to some qualitative aspects that are essential for enhancing the environmental sustainability of development, and that cannot be neglected in the long term. On this basis, it is recommended that the key indicators used for monitoring the implementation of China’s planning be selected to focus on the desired qualitative impacts of sustainable development, rather than on intermediate outcomes.

(iii) Enhancing the Sustainability of Development

7.35 Our preliminary assessment also leads to the impression that the current approach for increasing resource efficiency and enhancing sustainable development has relied heavily on administrative measures and centrally funded investments. Such a combination has the advantage of producing quick effects, evident in the progress achieved so far, but leads to concerns about the financial and administrative burden on the government, and the efficiency with which the objectives are being pursued, which

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could affect the long term sustainability of development.

7.36 Financial burden: result-oriented versus input oriented: The lack of funding remains a key obstacle. On the other hand, government officials are still more concerned about finishing projects on schedule than whether the public funds spent in these projects really achieve the expected results, since their performance is still mainly judged by inputs accomplished, rather than result and effectiveness. One of the reasons is that it is much easier to measure inputs than to measure its results. To tackle this issue, the World Bank has worked with the NDRC to develop a results monitoring and evaluation system. However, its institutionalization and eventual adoption by the government in routine operation remains uncertain. More result-oriented management would be important for China to ensure that its scarce financial resources are effectively utilized

7.37 Efficiency and Balance of Investments: There are indications that that the current heavy reliance on public funding has led to certain imbalances that affect the overall efficiency of the investment program. Thus, for example, investments in pollution control have concentrated on end-of-pipe solutions rather than moving to less polluting technologies. Irrigation water savings investments have focused on infrastructure improvements rather than enhancing demand management. Forestry investments have focused more on increasing forest cover than improving ecological functions, and on planting trees, rather than pre- and post-planting care and maintenance. Such lack of attention to overall efficiency tends to increase the financial burden on the government and undermine the long term sustainability of the results.

7.38 Administrative Burden: The linkage between the achievement of key indicators and the performance appraisal system for local governments has undoubtedly contributed to the generally positive results achieved so far, but concerns have been expressed about the sustainability of such an approach in the face of growing fatigue among local governments. In the long term, the ability of the central government to influence local governments by administrative means may weaken as the economy and society become more complex and other priorities emerge. This points to the advisability of devoting more attention to the creation of a policy and institutional framework that will continue to encourage resource efficient and environmentally friendly production modes and behaviors even as the government’s involvement becomes smaller and it shifts its focus to other areas.

7.39 Consistency of Development Objectives: Air and water pollution in China already exceeds applicable standards in most areas. Freshwater withdrawals already exceed sustainable levels of both surface and underground resources. The forest cover remains far below the level needed to restore its environmental and ecological functions, even though a massive reforestation effort has been under way for nearly a decade. It is thus essential that the 11th 5YP targets be achieved, maintained and built upon to ensure that the country’s development can become more sustainable in the future. There are tensions, however, between these objectives and the current concentration of industrial growth in resource intensive, highly polluting sectors such as steel and other metals, cement, plastics, pulp & paper, and coal-fired power plants. These tension needs to be

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addressed through rebalancing of the pattern of growth towards growth that is less industry-led and less capital-intensive (Chapters 1 and 2).

7.40 Lesson: The 11th 5YP’s heavy reliance on administrative measures and centrally funded investments has the advantage of producing quick results, but has elicited concerns about the financial and administrative burden on the government, and the efficiency with which the objectives are being pursued, which could affect the long term sustainability of development. Lessons from the experience in many countries suggests that more efficient and sustainable results can be achieved with better balance between administrative and market incentives, which can also generate incremental private sector financing. Going forward, it is recommended that greater attention be given to the development and implementation of market-based instruments for environmental and natural resource management, supported by the strengthened enforcement of applicable regulations and standards.

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Annex 1: Overview of Structure of the 11th 5YP

1. The 11th 5YP has an elaborate structure, with 6 guiding principles, 6 overall orientations, 9 major objectives, and 15 main tasks and strategic priorities.

2. Chapter 1 of the 11th 5YP lays out the guiding principles, overall orientation and objectives. It identifies six guiding principles (p 4): 66,67

Maintain steady and rapid economic development: relying more on domestic demand and consumption, and less on investment, keeping macro balance;

Speed up the transformation of economic growth pattern: to a more rebalanced and sustainable one, using fewer resources and protecting the environment;

Improve the capability for independent innovation: using science and education;

Promote coordinated development between urban and rural regions: solving “3 rural issues” (agriculture, farmers, and the country side), and promote the new socialist countryside and sound urbanization;

Build harmonious society: being people-centered, resolve practical issues affecting people, coordinate development economy and society, promote social equity and shared growth, promote democratic and legal system construction, maintain social stability;

Deepen reform and opening up to the outside world: reform in direction of the socialist market economy, improve modern enterprise system and property right system, have prices be determined by markets and resource scarcity, increase resource allocation efficiency, “practically change government functions” and improve macro control, continue opening up to the outside world.

3. In accordance with these guiding principles it lays down six policy orientations:

Expand domestic demand, especially consumer demand, change composition of demand from relying mainly on investment and exports to more balance;

66 Page numbers are as in the English translation.67 The World Bank has not been asked to evaluate the tasks in italics by NDRC.

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Optimize industrial structure, shift drivers from industry and quantities to the 3 sectors (including agriculture and services) and structural upgrading;

Save resources and protect environment: based on a change in the pattern of growth, move sources of growth from “resource investment” to efficiency increase;

Enhance the capability of independent innovation: shift drivers of growth from “fund and physical investment” to science, technological progress, and human capital;

Deepen reform and opening up: move away from administrative intervention towards market driven development with macro control and adjustment by the state;

Be people-centered: emphasize improving people’s living standards, shift emphasis from increasing material wealth to promoting comprehensive human development and coordinated development of economy and society.

4. Following on 6 guiding principles and 6 policy orientations, the 5YP (p 6) describes nine major objectives in order to achieve a Xiao Kang society, supported by 22 quantitative benchmarks (Table 1.2 of the 5YP). 68

Stable operation of macro economy, with robust growth of GDP and urban employment, and moderate inflation and basically balanced external trade;

Optimization and upgrading of industrial structure, rationalize industry and enterprise organization structure, increase share of the service sector, increase spending on R&D {, in order to enhance independent innovation}, develop a group of “superior” companies with IPRs, well know brands, and strong international competitiveness;

Significant increase of resource utilization efficiency, reduce energy and water intensity, increase water available for irrigation, and {use comprehensively} industrial solid waste;

Coordinated urban and rural development, building the new socialist country side, increase urbanization, prevent increase in urban-rural inequality in incomes, living standards, and public services;

Improved basic public services, ensuring 9 years education, have a sound public health and medical services system, increase social security coverage,

68 The interpretation in the IDF report (p 41) is similar but a bit different.

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including old-age insurance and the rural cooperative medical system, decrease poverty;

Enhanced sustainable development, contain population, keep up farmland retention, safeguard water, increase energy and mineral resources, stop ecological/environmental deterioration, reduce emission major pollutants, increase forest coverage, and control greenhouse gas emission;

Enhanced market economy, reforming administrative management, SOEs, finance and taxation, banking, science and technology, education, culture and health, coordinate opening up to the outside world and domestic development, and open up further;

Improved living standards, increasing per capital disposable incomes and the quality of life, and improving conditions in housing, traffic, education, culture, health, and the environment;

Progress with democratic legality and spiritual civilization building, progress with legal reform, ideology and morality, and the harmonious society.

5. In Chapter 13 of the Plan, around 15 main tasks and strategic priorities are outlined. These are not yet concrete policies.

1. Building up new socialist country side (p 9): develop modern agriculture (higher productivity, agricultural structural adjustment, enhance agricultural service system, improve markets), increase peasants’ income (agricultural income, non-agricultural income, fiscal impact), improve rural conditions (infrastructure, rural environmental protection, rural health service, rural social security), train new type peasants (education, skill training, culture), increase agricultural and rural investment, deepen rural reform;

2. Optimization of industrial structure (p 16) (here, seems to be filled in as “how to improve competitiveness and upgrade”): accelerate development high-tech industry (electronic, information, and manufacturing industries; bio industry; air space industry); equipment manufacturing industry (major technical equipment, automobile, shipbuilding); optimize energy industry, with conservation, with coal as basis, build stable, economic, clean and safe energy (coal, electric power, petroleum and gas, renewable); adjust raw material industrial structure and distribution (optimize metal industry, adjust distribution chemical industry); light and textile industry; informatization;

3. Development of service sector: producer-oriented service industry {“deepen professionalized work division”, reduce social transaction costs and

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improve resource allocation efficiency} (traffic transport industry, modern material circulation industry, finance, information services, commercial services); enrich consumption service industry (commercial and trade, real estate, tourism, town public utility, community service, sports); policy guidance (p 29): break monopolies and entry barriers, separate profit oriented organizations from non-profit ones, large cities should favor services industry;

4. Coordinated regional development (including urbanization) (p 30): overall regional development strategy (western development, old industrial bases such as NE, central region, east takes lead in development, old revolutionary bases, minority areas, border areas), formation of principle function area (optimized development zone, key development zone, restricted development zone, classified management regional policy); sound urbanization (guide population urbanization by classes, rational urbanization spatial layout, urban planning);

5. Building resources-saving and environment-friendly society (p38): recycle economy (conserve energy, save water, save land use, save materials, strengthen comprehensive resource utilization); strengthen policy measures to promote conservation (standards, specification, power demand side management, implement finance and taxation, price and investment policies conducive to resource conservation, replace petroleum); protect and remedy natural ecology {from treatment to prevention}; strengthen environmental protection (water pollution prevention, emission, solid waste, environment protection); strengthen resource management (water, land, mineral); ocean and climatic resources; 69

6. Strategies of science, education and talents to revitalize the nation (p 46): scientific and technological innovation (independent innovation, technological innovation, increase protection IPR, reform scientific and technological system); education development (compulsory education, vocational education, higher education, increase educational investment, reform management); human resource development (high quality talent team, innovate talent work mechanism)

7. Deepen reform and opening up (p52): administration system (change government functions, improve government decision making, reform investment system); improve basic economic system (SOE reform, SOE asset supervision, reform monopoly industries); reform fiscal taxation system (fiscal, taxation); reform monetary system (reform financial enterprises, direct financing, improve financial regulation and control, financial supervision); improve modern market system (national market, price formation of resources and utilities, standardize market order); win-win opening (optimize export

69 No obvious role for prices here.

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structure, actively enlarge imports, develop service trade, improve fair trade policy); improve quality of FDI ; go-out; international regional economic cooperation;

8. Promote socialist harmonious society (p61): population work (birth control, structure births, respond to population aging, women and children’s rights, handicapped); improve living standards (expand employment, strengthen income distribution, improve social security system, strengthen poverty relieve work, expand consumption); improve people’s health (public health and medical service system, disease prevention and treatment, Chinese medicine, deepen health care reform); public safety (disaster, work safety, food safety, national safety and social stability); social management (grass roots organizations, NGO’s, deal with contradictions among people);

9. Strengthen socialist democratic and political construction (p 69):

10. Strengthen the building of socialist culture (p 70): strengthen socialist cultural construction (ideological and ethical progress, enrich people’s cultural life, reform cultural system)

11. Strengthen national defense and army building (p 72)

12. Establish and complete planning and independent mechanism (p 74): implementation mechanisms for guidance different areas; adjust and improve economic policy making; improve planning and management system. 70

70 Page 75: fiscal, change composition of expenditures, tax policies.

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Annex 2: Monitoring and Evaluation Framework

1. Based on the experience of the mid-term review of the 10th 5YP, the NDRC decided to establish a methodology and institutionalize arrangements for future M&E plans. A project financed by a World Bank (WB) Institutional Development Fund (IDF) grant to the NDRC supported the development of a 3 tier M&E framework. Annex 1.1 briefly discusses the framework.

2. The framework starts from the overall goals and “guiding principles” of the plan—the 5 balances. The 5 balances and a set of 15 goals (p 42) are the agreed principles for the M&E framework.

3. A three-tiered monitoring indicator framework was developed.

The first tier is the matrix in the 11th 5YP which contains 22 major indicators (14 “benchmarks” and 8 “targets”; with the government holding itself responsible for the targets. “The central government will guarantee the meeting of these targets by appropriately allocating the public resources and effectively using the administrative means.” (11th 5YP)

The second tier contains 51 indicators, including the 22 indicators in the first tier, organized around the principles of the 5 balances. This is considered the core of the monitoring framework.

The third tier contains 99 indicators, including all tier two ones and all the indicators mentioned in the text of the 11th five year plan. Work on the mid-term review could “pick and choose”.

4. The IDF work also developed a suggested set of input indicators and activities (table 4, p 68), and did initial information gathering for several input indicators. Analysis of the input information will be useful for the mid-term evaluation.

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Annex 3: Progress in Implementing the 11th 5YP: Summary Results for 45 Tasks of Chapter 10, 11 and 13 71

No. To-do tasks as stated in the 5YP

Evidence of progress in implementation Relevant government actions taken

Remarks and Progress Impression (S=satisfactory; Q=questionable”

Chapter 10: Accelerating the Development of Hi-tech Industries1 Accelerate the development

of hi-tech industriesThe ratio of value added of officially defined “hi-tech” industries to GDP rose by 0.35 percentage points from 2005 to 200672.

Year %1995 1.782000 2.782004 3.972005 4.422006 4.77

A range of policies supporting hi-tech industries have been implemented, including those shown below.

The 11th 5YP for Hi-Tech Industries expects a 10% ratio of hi-tech industrial value added to GDP. It needs to be raised by 5.23 points in four years, which seems extraordinary in view of the less than 2 points increase during 2000-05. Impression: Q

2 Develop core sectors such as integrated circus, software and new components and parts with great force

Growth Rates of Integrated Circus and Software Sectors73 (%, year on year)

2006 2007Output of integrated circus 26.3 22.6Business revenue of softwares 22.9 21

The government has designated the first batch of integrated circus producers to receive special government in the form of favorable policies, following a regulation of NDRC in 200574

Impression: S.

71 This annex draws on Yang Jianlong and others, “Evaluation of the Progress of 11 th FYP in Optimization and Upgrading of Industrial Structure”, background report prepared for the World Bank. March 2007. 72 《中国高新技术产业统计年鉴 2007》，表 1－1，1－2。73 http://www.mii.gov.cn/art/2007/02/27/art_941_28904.html; http://www.mii.gov.cn/art/2007/02/27/art_941_28904.html

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3 Build industrial bases of software, micro-electronics and optical electronics

The total revenue of the nine national IT industry bases in 2007 represents a 56% increase over 2004. There are 40 national information industrial parks, which account for over one quarter of the national output of the industry in 200775.

Impression: S.

4 Make breakthrough in high-powered computer (HPC) technology at the scale of million billion times per second, and industrialize HPC at the scale of thousand billion times per second

China S&T University produced KD-50-I HPC on Dec. 27, 2007, which is the first HPC at the scale of thousand billion times per second produced in China equipped with a domestically produced chip (Dragon Chip 2F).

Impression: S

5 Build demonstration projects for next generation of internet and achieve industrialization of key technology, equipment and software

A series of projects have completed and passed NDRC appraisal. Breakthrough has been achieved in IPv4/IPv6 and CNG1 technologies.

NDRC76 “organized the implementation” by approving proposals of demonstration projects, application experiment projects and industrialization projects, and providing financial support.

Impression: S

6 Develop bio-pharmaceuticals as a key priority

Total output of bio- pharmaceuticals grew by 14.6% in 2006 and 23.4% in the first ten months of 200777.

NDRC approved an 11th 5YP for bio-technology industry. China Development Bank (CDB) joined NDRC78 in June 2007 to provide financial support to bio-technology firms. Proposals are to be screened

Impression: S

7 Develop bio-energy as a key priority

Following four fuel ethanol devices at the scale of 300,000 tons that started production in the 10th 5YP period, COFCO’s device of fuel ethanol based on cassava (木薯) started production in Hepu Industrial Park of Guangxi at end of 2007, with an annual capacity of 200,000 tons, which is the first non-grain based device. The second phase of the project is under construction. Sweet sorghum

Impression: S

74 http://www.gdgnsme.com/news_view.asp?newsid=3975 http://www.mii.gov.cn/art/2008/02/19/art_27_36200.html 76 http://www.sdpc.gov.cn/gzdt/t20051018_45555.htm; http://www.ndrc.gov.cn/zdxm/t20051018_45564.htm; http://www.ndrc.gov.cn/xmsphz/t20060927_125916.htm; http://www.sdpc.gov.cn/zdxm/t20051227_54697.htm; http://www.sdpc.gov.cn/gjscy/xxcy2/t20060217_59838.htm; http://www.agri.gov.cn/zcfg/bmgz/t20080222_977034.htm.77 《中国科技投资》，2008年第 1期.78 http://www.law-star.com/cac/40010999.htm

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(甜高粱)-based ethanol technology has been in the stage of mid-term test in Guilin (Guangxi) and Wuyuan (Inner Mongolia).79

firstly local DRCs, reviewed by NDRC, which will then recommend to CDB for final decision.

8 Develop new sub-line airplanes

By Oct. 30, 2006, there had been 71 orders for China’s ARJ21-700 new sub-line airplane.80

Impression: S

9 Develop large airplane The State Council approved the creation of China’s large passenger airplane company on Feb. 26, 2007 to launch the special program of large airplane development.

Impression: S

10 Promote the transition of astronautics industry from a mode of experimentation and application to one of business service

Total output of China’s applied satellite navigation was RMB2 billion in 2002, over RMB10 billion in 200581, before jumping up to over RMB20 billion in 200682.

Impression: S

Chapter 11: Revitalizing the Equipment Manufacturing Industries12 Raise the market share of

automobiles with self-owned brands

The market share of automobiles with self-owned brand stood at 25% in 2005, and increased only to 26% in 200783.

NDRC disqualified 116 automobile producers in March 200684.

The target set by 11th 5YP for automobile industry is over 50%. This ratio needs to rise by 24 points in the coming three years, while it rose only 1 point from 2005-07. Impression: Q

79 数据来源：中国报告大厅，http://www.chinabgao.com/freereports/19455.html80 http://sh.eastday.com/qtmt/20071221/u1a385223.html81 数据来源：新浪网，http://tech.sina.com.cn/it/2005-04-30/0602598826.shtml82 数据来源：陕西中小在线，http://news.smeshx.gov.cn/i%5C178379388.htm83汽车工业年鉴 2007，中国汽车工业“十一五”发展规划。其中 2007 年数据来自中国汽车工业协会 http://www.auto-stats.org.cn/ReadArticle.asp?NewsID=5018.84 http://info.feno.cn/2006/110302/c000001734.shtml

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13 Bring into being some enterprises that have production capacity of over one million vehicles by guiding enterprises to merge and reorganize in competition

The largest three producers, i.e., Shanghai, First, Dongfeng, saw their total production exceeding one million in 2006 and 2007. Shanghai Automobile took over Nanjing Automobile at end of 200785, which will help it to increase its output to 2 million by 2010. However, the degree of concentration in the whole sector remains largely unchanged in 2006-07, as shown below86 (%).

2005 2006 2007C3 46.09 46.44 47.07C10 83.95 84.16 83.41

There can be conflict between this and the previous targets, as self-owned brands are from small producers (Qirui, Jili), which are unlikely to overtake the big three in the near future. Impression: Q

14 Strengthen capacity of complementary vessel equipment production

Ratio of domestically made complementary vessel equipment installed in vessel (本土船用设备装船率) increased to 49.5% in 2006 from 46.1% in 200587.

Commission of Science and Technology Industry for National Defense (COSTIND) released a draft regulation for public consultation on Aug. 24, 2007, which is intended to introduce production licenses for shipbuilding88.

The Medium and Long-term Program for Shipbuilding Industry sets a target of over 60% for this ratio. It was still 10 points away from the target in 2006, although the 2006 ratio of 3.4 points higher than 2005. Impression: Q

15 Optimize three major categories of vessel products: bulk carrier, oil tank and cargo carrier

Received orders of Chinese producers accounted for 28% (bulk carriers), 30% (oil tanks) and 21% (cargo carriers) of world market total in 200689. Total shipbuilding production in 2007 accounted for 23% of world total, up by 4 percentage points. Total received order of shipbuilding in 2007 rose by 132% over 200690.

Impression: S

85 China Business News, Dec. 27, 2007.86中国汽车工业协会. website87船舶工业中长期发展规划（2006～2015年）source of 2006 data?88 http://www.costind.gov.cn/n435777/n569696/n569708/114666.html。89 http://www.xinhuanet.com/chinanews/2007-11/03/content_11564877.htm . 90 http://china.shipe.cn/Info/139668/Index.shtml .

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16 Build shipbuilding bases in Bohai circle, Yangzi river delta and Pearl river delta.

Status of shipbuilding bases construcitonShanghai Changxing Island Phase I started production

Guangzhou LongxueTesting production started at end of 2007

Zhejiang HukouduStarted production in November 2007

Zhejiang Jiuzhou Phase I started productionZhejiang Zhoushan Started production in 2007Jiangsu Jinling Started production in January 2008

Impression: S

17 Priority: large scale high-efficiency clean power generation equipments, including: million KW ultra supercritical thermal power generators (百万千瓦超超临界火电机组)

No. 4 generator of Zhejiang Yuhuan Power Station passed testing operation of 168 hours in November 2007, which marked success of million KW ultra supercritical thermal power generators (百万千瓦超超临界火电机组) produced by Harbin Boiler Factory91.

Impression: S

18 Priority: large scale high-efficiency clean power generation equipments, including: fuel gas-steam joint circulation generators (燃气—蒸汽联合循环机组)

Anshan Steel completed its CCPP project on July 19, 2007, which installed the first fuel gas-steam joint circulation generators (燃气—蒸汽联合循环机组) in China92.

Impression: S

19 Priority: large scale high-efficiency clean power generation equipments, including: Integrated Gasification Combined Cycle(IGCC) power generator (整体煤气化燃气－蒸汽联合循环机组)

Huaneng Group signed agreements with Tianjin municipal government on Sept. 1, 2006 and April 18, 2007 on the first and second phases of collaboration in building IGCC demonstration project in Tianjin93. Another IGCC plant, the largest in the world so far, will be built in Dongguang, Guangdong province by 201194.

Impression: S

20 Priority: large scale high- The first 210,000 KW large CFB boiler with complete Impression: S

91 “首套国产百万千瓦超超临界火电机组运行成功”，http://www.ceptc.com/news/News_View.asp?NewsID=1833。92 “国内第一台燃气蒸汽联合循环发电机组竣工投产”，http://liaoning.nen.com.cn/77970767572107264/20070720/2271774.shtml。93 “华能绿色煤电起步，IGCC示范项目落户天津”，http://news.cepee.com/html/2006/9/2006949386.htm；“华能将在天津建设绿色煤电二期 40 万千瓦级 IGCC电站”，http://china.epenet.cn/Info/92261/Index.shtml。94 “我国将建全球最大环保电站每小时发电 80万千瓦时”，http://www.cpeinet.com.cn/new/displaynews.aspx?id=ff9ec3f8-2481-4975-9a2a-fb6c29d8fa7f。

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efficiency clean power generation equipments, including: large Circulating Fluid Bed (CFB) Boiler (大型循环流化床锅炉)

domestically owned IPRs passed 96 hours of testing operation in July 200695; the first 300,000 KW CFB boilder with complete domestically IPRs is under production96.

21 Priority: large scale high-efficiency clean power generation equipments, including: large power wind generator equipment (大功率风力发电设备)

The development of the first 2MW variable-speed constant-frequency wind power generators (变速恒频风力发电机组) with complete domestically owned IPRs reached success in Chongqing in November 200797

Impression: S

22 Priority: mastering the manufacturing technology for key transmission and transformation equipments of ±500 KV direct currentand 750KV alternating current.

China has reached international technological frontier in the design and manufacturing 500千伏超高压输变电 equipments. In the demonstration project of Qinghai-Gansu 750 千伏交流输变电 , China has mastered manufacturing technology of key equipments of 750千伏交流输变电. In the western power to east project, China has also mastered manufacturing technology of key equipments ±500千伏直流输电98.

Impression: S

23 Priority: developing set equipments for 1000 千伏特高压交流和±800 千伏直流输变电

June 15, 2007, 1000千伏同塔双回试验线段带电成功，标志着国家电网公司特高压交流试验基地实现了全站带电 .Dec. 17, 2007, 国家电网公司与 8家设备制造企业在北京签署了四川－上海±800千伏特高压直流工程主设备合同，标志着该特高压直流示范工程设备研制生产进入全面实施阶段.99

Impression: S

24 Priority: promoting domestic production of million tons scale set equipment for ethylene

When the million tons ethylene device in Maomin, Guangdong province, started production in September 2006, 448 of its 510 equipments were domestically made, the highest share of domestic products100.

NDRC policies restricts imports of petro-chemical equipments. All new petro-chemical projects are

Impression: S

95 “首台自主知识产权大容量循环流化床锅炉投运”http://news.cepee.com/html/2006/7/20067128328.htm96 “利用煤矸石发电 CFB锅炉迎来新机遇”，http://www.cpeinet.com.cn/new/displaynews.aspx?id=d4cf9a60-353b-4c6d-86e8-14bd7810eaea97 “国内最大功率风力发电机组在渝研制成功”http://news.cepee.com/html/2007/11/20071127101935.htm。98 “我国装备制造业自主创新和世界装备制造业发展情况”，张国宝， 2007 年 12 月 29 日。 http://chinaneast.xinhuanet.com/jszb/2007-12/29/content_12084503.htm99 http://www.sgcc.com.cn/ztzl/zgtgy/default.shtml100 http://www.chcj.net/thread-917849-1-1.html

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required to submit a list of equipments to NDRC, and import is not allowed for those equipments that have been made domestically and widely adopted.101

25 Priority: developing devices of coal liquefaction and coal-to-olefins transformation (煤炭液化和气化、煤制烯烃)

The Shenhua Group’s coal-to-oil demonstration project of one million tons completed equipment installation at end of 2007, the first product is expected to emerge in September 2008102. The Yankuan demonstration project of indirect coal liquefaction passed NDRC appraisal in January 2008. The first production line of one million tons oil will be completed by end of 2009103. Shenhua Group is building four sets of coal-to-olefins devices. Its Baotou device started construction in 2005 and is expected to complete in September 2008104. Some equipments installed in the project are still imported ones105.

NDRC issued notice in 2006 to encourage the “healthy development of coal-chemical industry by strengthening regulation of projects”. It requires demonstrative coal liquefaction projects not being disseminated before achieving success, and coal-to-oil projects below the scale of 3 million tons per year, coal-to-olefins projects below the scale of 0.6 million tons per year should not be approved. Those that are under construction without approval should be called off106.

Impression: S

26 Priority: comprehensive coal mining equipment

The first set of comprehensive coal mining equipment at the scale of 6 million tons per annum passed appraisal in Ningxia in January 2007. MOST approved Taiyuan Mining Machinery Company to lead the technology development project for high-efficiency integrated mechanic-electric equipment serving coal mining of the

Impression: S

101 http://finance.jrj.com.cn/news/2007-11-30/000002993180.html102 http://finance.sina.com.cn/chanjing/b/20080304/02104574733.shtml103 http://www.enoya.com/read.php?tid=3320562 104 http://www.xcar.com.cn/bbs_dz55/viewthread.php?tid=7153151105 http:// lz.fengj.com/html/164/news_show_164605.html 106 http://www.sdpc.gov.cn/gyfz/gyfz/t20060713_76372.htmhttp://www.china.com.cn/economic/zhuanti/wyh/2008-01/22/content_9566912.htm

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scale of 8-10 million tons per annum. Shenhua Group has gained the technological capacity to manufacture hydraulic pressure support, which accounts for 70% of the value of comprehensive coal mining equipment and the market has been totally occupied by imports.

27 Priority: mastering the core technology for high-speed train at the scale of 200km/h and above, and achieving industrialization

CRH EMUs at the speed of 200km/h and 300km/h were successfully put in operation in 2007. EMUs at the speed of 350km/h are under development107.

The government has decided to build high-speed special passenger railway lines for Beijing-Shanghai, Beijing-Guangzhou, Beijing-Harbin, Shenyang-Dalian and Longhai, at the speed of 200km/h and 300km/h during the 11th 5YP period. The existing lines will continue to raise their speed. Total investment amounts to RMB1.25 trillion. This creates large demand for domestically manufactured trains and stimulates technological progress108.

Impression: S

28 Priority: large environment protection equipments including those of urban and industrial waste water processing

The special program of “water pollution control” run by MOST has developed 11 core technologies, filed 421 patent applications, and constructed over 100 demonstration projects109.

Information is limited to gauge the progress, but it seems still some distance away from mastering the core technology of this equipment. Impression: Q

30 Priority: large environment At end of 2005, the total capacity of installed desulphurization (脱 Impression: S

107 “看亮点，话发展从 200公里到 300公里，南车四方驶出中国速度”，http://www.qingdao.gov.cn/n172/n1530/n32936/464580.html; “时速 350公里动车组列车研制工作也已全面启动”，人民铁道，2007年 9月 10日，第A04版.108 “铁路大提速推出千亿元盛宴”，经济参考报，2007年 4月 12日，第 001版。109 www.gov.cn/gzdt/2006-05/22/content_287274.htm; http://news.163.com/06/0412/08/2EGB7L210001124J.html

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protection equipments including those for air pollution

硫) device for power generators stood at 44 million KW. In 2007, total capacity of this kind of devices that started operation or completed construction reached 50 million KW110. China has mastered the mainstream technology with its own IPRs for haze desulphurization (烟气脱硫) for 0.3 million KW thermal power generators111. The first domestically produced desulphurization device for boilers of 600 兆瓦超临界 generators passed 168 hours testing operation in Changsha in October 2007112

.

31 Priority: large environment protection equipments including those for sea water utilization

As of 2006, China had mastered the two mainstream technologies for seawater desalination and reduced the cost of desalized seawater to RMB5 per ton, close to international standard113.

Impression: S

32 Priority: lifting the technological level of large, precise and high-speed digital machine tools

Since 2006, hi-speed processing centers produced by Dalian and Shenyang machine tool producers have won international bidding. Chinese aviation and aerospace equipments producers have adopted five-axis hi-speed processing centers and milling machines built by Ningbo, Shenyang and Jinan producers. Over 20 producers gained capacity in producing five-axis joint-movement processing centers. Shenyang Machine Tool Company has gained the capacity of producing series of five-axis lathe-milling centers, some of which exported to Germany and the U.S.114 The share of digital machine tools in total machine tool output value rose from 35.5% in 2005 to 42% in 2007. However, in the domestic market for digital machine tools, domestically made products accounted for only 31%, slightly higher than 30.4% of 2005 and far from the 11th 5YP target of 50%115.

A joint notice of MOF, NDRC, SAT and the Custom in January 2007116 issued import tax refund policies for imports of key parts and components, raw materials that are required to produce 16 key equipments, including large, precise and high-speed digital machine tools. Refunded tax is left with the importers as government equity investment to finance R&D.

The 11th 5YP target is set at over 50% market share of domestically made digital machine tools. There was a gap of 19 percentage points in 2006 and the progress made in 2006 was only 0.6 point. Impression: Q

Chapter 13: Adjusting the Structure and Spatial Layout of Raw Material Industries33 Resolve the problem of over-

capacity in the steel industry At end-2005, China’s steel industry had a steel-making capacity of 414 million tons for steel-rolling capacity of 420 million tons.

The State Council held working conference for

Growth of new capacity did not

110 http://www.51report.com/free/detail/32516.html111 http://www.01hr.com/dianlizhaopin/electpin_article_detail.do?op=detail&id=567112 http://www.cs.com.cn/gz/04/200712/t20071204_1255622.htm113 http://www.jfdaily.com/gb/jfxww/jishibb/node9367/userobject1ai1494618.html114中国产业竞争情报网http://www.chinacir.com.cn/zxqb/200773193949.html115 数据来源：中国二手设备网 http://www.fengj.com/html/113/news_show_113026.html116 数据来源：http://www.chinatax.gov.cn/n480462/n480483/n480565/5077405.html

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as a priority by strictly controlling new capacities and phasing out technologically backward capacity at faster pace

Newly built steel-making capacity was 62 million tons in 2006, and newly built steel-rolling capacity was 79 millions in 2007.117 However, there has been report of new capacity growth slowdown in the first months of 2008118. Progress in phasing out backward capacity has been slow. As of mid-2007, the ten provinces that have signed responsibility contracts with NDRC completed only 43% of their targeted amount for iron and 36% for steel119.

phasing out backward steel production capacities. NDRC signed responsibility contracts with 18 provinces (cities), which promised to phase out steel making capacity of 77.76 million tons by 2010120.

seem to be under control in 2006-07. And it seems still a long way to go to achieve the target of phasing out capacity by 2010.Impression: Q

34 Promote circular economy in the steel industry

There is remarkable performance in terms of energy efficiency and reduction of emission in the steel industry in 2006-07, as shown below121 (% change yoy, for per ton of steel):

Indicator 2006 Jan-Oct. 2007

Comprehensive energy consumption -7.10 -2.32Fresh water consumption -14.90 -16.24Smoke emission -2.99 -0.82Dust emission -1.76 -1.48Sulphur dioxide emission -4.10 -0.40

Impression: S

35 Bring into being some internationally competitive firms by encouraging cross-regional reorganization

Dividing steel producers into groups according to their output and looking at the share of each group in total output of the industry (table below122), one finds increasing prominence of both the largest and smallest producers. This trend is confirmed by another set of data123: the market share of largest ten producers has been stable around 34% during 2004-06, while that of producers who ranked 61th and smaller increased from 17% in 2004 to 23% in 2006.

Groups (million tons)

2004 2005 2006

>10 12 30 325-10 33 19 192-5 29 23 221-2 10 9 7

The large producers are expanding rapidly, while small producers are also increasing their market share. Impression: S

117 http://blog2.eastmoney.com/blog_look1.asp?dcuser_name=zzmm1234&dcblog_id=460453 118 http://www.chinaccm.com/51/5105/510501/news/20070625/094134.asp 119 数据来源：http://www.tncsteel.com/data/2007/0906/article_23250.php120 http://finance.sina.com.cn/roll/20071228/02301893732.shtml .

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<1 16 19 2136 Control the production of

electrolytic aluminum The production of electrolytic aluminum does not seem to have been controlled,

Year electrolytic aluminum output124 (million tons)

2004 10.72005 122006 14.5

Impression: Q

37 Develop the production of aluminum oxide

The production of aluminum oxide has increased sharply.Year aluminum oxide output125 (million tons)2004 9.62005 152006 27

Impression: S

38 Expand oil refinery capacity in oil-consumption regions and control oil refinery capacity in regions where capacity is relatively excessive

Table below126 shows the nine provinces that have started building new oil refinery capacity or will do so in 11th 5YP. Most of them are consumption regions, except for Liaoning and Xinjiang and Tianjin.

Province Gasoline consumption as % of production

New refinery capacity in 11th 5YP (million tons)

Fujian 47.6 12Guangdong 52.0 18Guangxi 13.2 10Hainan 0 8Liaoning 271 20Shandong 101 10Tianjin 122 7.5xinjiang 225 10Zhejiang 78 12

Impression: S

121 数据来源：和讯网 http://news.hexun.com/2007-12-14/102300461.html122 数据来源：http://content.caixun.com/NE/00/d9/NE00d9jb.shtml123 数据来源：http://content.caixun.com/NE/00/d9/NE00d9jb2.shtml124 数据来源：http://www.singtaonet.com/trade/200701/t20070131_443179.html125 数据来源：http://www.mmimm.com/SRD1220399/

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39 Build urea production bases at the scale of million tons in regions of energy production and grain/cotton production

There are eight urea projects that have started construction or will do so. Three of them locate in Inner Mongolia (energy production province), two in Xinjiang (energy, grain and cotton production province), one in Qinghai (energy production) and one in Anhui (grain production) 127.

Impression: S

40 Build potassium fertilizer production base in Qinghai and Xinjiang

Qinghai Salt Lake Group accounts for 80% of national production capacity. The second phase of is million tons potassium fertilizer project is under construction128. The project of Luobu lake production base at the scale of 1.2 million tons is reportedly proceeding smoothly, to be expected to start production at end of 2008129.

Impression: S

41 Control total production of pesticide, develop high-efficiency, low-poison pesticide

Total production of chemical pesticide increased by 24.3% in 2006 and 20.2% in 2007130. Five high-poison pesticides, including methylamine phosphorus, were banned from production, sales and consumption in January 2008131.

Impression: S

42 Adjust the structure of construction materials industry focusing on energy saving, environmental protection and quality improvement

Key indicators of energy efficiency and emission control below132 suggested significant progress.

Indicator 2005 2006 2007Comprehensive energy consumption133 (ton standard coal per 10000 yuan value added)

6.14 5.65 5.10

Of which the cement 14.06 12.56 12.05

Impression: S

126 国家统计局，wind资讯127 中国拟在建项目网www.bhi.com.cn128 http://finance.sina.com.cn/stock/t/20070323/10201284564.shtml 131 http://www.agrichem.cn/news/2008/1/11/200811117332956699.shtml130 国家统计局129 http://byglnews.xjnews.cn/html/200709/6/20070906120604.htm132 “2005年数据来自“产业发展迅猛，全球性建材企业呼之欲出”，www.bmlink.com/news/html/news_Info82_099550717.html；“2006年建材工业快速稳定发展”，www.3869.com/newsshop/news_call/news_02/200714/200714225217.asp . “2006年数据来自“张人为：增强责任感和使命感大力推进建材循环经济的发展”，www.cs.ecitic.com/news/NewsContent.jsp?docId=1161631 . “ 2007年数据来自“十一五期间建材工业万元增加值能耗下降 20%”，www.c-bm.com/hydt/lianjie1.asp?id=29663133 “十一五期间建材工业万元增加值能耗下降 20%”，www.c-bm.com/hydt/lianjie1.asp?id=29663；“2007年建材工业万元增加值综合能耗下降 11％”，www.c-bm.com/hydt/lianjie1.asp?id=28843；“张人为：增强责任感和使命感大力推进建材循环经济的发展”，www.cs.ecitic.com/news/NewsContent.jsp?docId=1161631；“2006年建材工业综合能耗下降 11.35％”，http://house.northeast.cn/system/2007/09/01/050957270.shtml 。

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sector134

Smoke and dust emission (ton per 10000 yuan value added)

0.071 0.058

Sulphur dioxide emission (ton per 10000 yuan value added)

0.017 0.014

Carbon dioxide emission (ton per 10000 yuan value added)

6.23 5.32

43 Develop new suspension preheater (NSP) cement production at the scale of 5000 tons per day in regions where conditions are ready

The share of NSP cement in total cement production rose from 40% in 2005 to 55% in 2007135. 80 million tons of technologically backward capacity was phased out in 2007136.

Impression: S

44 Raise quality of glass The share of high-quality 浮法玻璃 and special category glass in total glass production rose from 23% in 2005 to 25% in 2006137.

Impression: S

45 Develop new types of energy-saving, environment-friendly construction materials with great force

The share of new types of wall body materials in total production rose from 40% in 2005 to 46% in 2006138.

Impression: S

134“雷前治在《水泥工厂节能设计规范》颁布新闻发布会上的讲话”，www.dcement.com/Article/200711/60711.html135“数据来自“建材工业‘十一五’发展规划纲要发布”，www.sz-sinoma.cn/UploadPDF/UploadPDF/200737132754291.pdf；“孔祥忠：水泥工业的结构调整和科技进步”，info.bm.hc360.com/2007/04/02142450227.shtml；“我国新型干法水泥比重提高到 55%以上”，www.bm.cei.gov.cn/allfile/12/2008021815085812023.asp。136“建材工业 2007年取得的成就及 2008年发展重点”，http://www.c-bm.com/news/2008/1-10/B9740705.htm。137“数据来自“建材工业‘十一五’发展规划纲要发布”，www.sz-sinoma.cn/UploadPDF/UploadPDF/200737132754291.pdf；“建筑与工业玻璃的结构优化有了新的进步”， www.bm.cei.gov.cn/allfile/04/2008022209064804008.asp ；“产业发展迅猛，全球性建材企业呼之欲出”，www.bmlink.com/news/html/news_Info82_099550717.html；“平板玻璃工业:结构调整任重道远”，www.bmlink.com/news/html/news_Info82_099718017.html。138“数据来自“建材工业‘十一五’发展规划纲要发布”, www.sz-sinoma.cn/UploadPDF/UploadPDF/200737132754291.pdf；“全国新型墙材现场经验交流会在杭州召开”，www.52jcw.com/news/Article/HTML/4697.html .

151

Annex 4: “New Socialist Countryside”

In the 11th 5-Year Plan, the construction of the New Socialist Countryside is described as follows:

1. Development of modern agriculture: Increase agricultural productivity; Promote structural adjustment in the agricultural sector; Improve the agricultural service system; and Improve the agricultural product circulation system (the markets).

2. Increase farmers’ incomes: Increase agricultural income; Increase non-agricultural income; and Improve the “Policy of Income Increase and Farmer Burden Reduction.”

3. Improve rural living conditions: Strengthen construction of rural infrastructure; Strengthen rural environmental protection; Develop rural health services; and Develop rural social security.

4. Train a “new type” of farmers: Further extend and strengthen the rural compulsory education; Strengthen rural labor force skill training; and Develop rural cultural activities.

5. Increase agricultural and rural investments

6. Deepen rural reforms

A detailed overview of the associated programs and policies is described in the background paper “Overview of Policies Related to Agriculture, Farmers and Rural Areas in China 2000-2007”, February 2008, China Agricultural University, College of Economics & Management which has been prepared for this chapter by Lin Wanlong, Cao Mei, and Wang Peng.

152

Annex 5: NDRC Investments in Agriculture and Rural Development

Investment Types Investment Per Year Description Target Areas

  2003 2004 2005 2006 2007    I. Water Conservancy and Meteorology 193 190 106.2 106 181    

1.Key Water Conservancy Projects 115 85 51.7 32 81.5 Targeting major rivers and dam safety Provinces in major river basins.

2.Strengthening and reinforcing Dangerous Reservoirs 46 41 20 25 32 Reinforcement of dangerous dams and reservoirs

Dams categorized as “dangerous” according to set procedures.

3.Water conservation rehabilitation on Large Irrigation Areas 15 13 24.5 21 21 Follow up construction and rehabilitation of main

dikes, secondary dikes, and other related facilities All country

4.Water Resources Protection 7 5 2 1 2 Urban and industrial water pollution control in water sources. Beijing surrounding areas

5.Meteorology radar and satellite 10 6 4 3 3.92 Weather radar and meteorological satellite construction. Selected provinces

6.Other   40 4 24 41 Other water conservancy projects All countryII. Forest & Ecological Protection 91 70 100.6 58.5 77    

Natural Forest Resources Protection and Return Slope-land to Forestry and Grassland

51 17 33 19.5 21

Forest fire protection; forest seeding; technical support; returning wasteland and slope-land to forestry in the upper Yangtze Basin and upper and middle ranges of Yellow River Basin

Relevant provinces

Sand Storm Prevention Project 16 32 16 10 14

In the areas where sand storms form, adopt grazing ban, grassland management, ecological resettlement, ecological afforestation, returning wasteland and slope land to forestry and grasslands, overall watershed management

Beijing, Hebei, Inner Mongolia

Key Forest and Forest Anti-fire Project 20 15 12 15 22

Forest fire protection, afforestation, ecological forestry on slopes, protection of natural forests, wetland protection, wildlife protection and rehabilitation

Selected provinces

Improve natural grassland 4 6 36.6 10 15 Fencing of grassland in Western provinces Western provinces

153

Investment Types Investment Per Year Description Target Areas

Other     3 4 5 Other ecological forestry projects All countryIII. Agricultural Comprehensive Productivity 34 36 25.2 35.5 50.23    

High-quality grain production   10 10 11.5 16

484 major grain production counties, 50 million mu standard farmland, 398 quality special seed cultivation projects, 321 special pest prevention areas, set up with 80,000sets of modern agricultural equipment

13 major grain production provinces

Improved seeds and other agricultural projects 18 14 8.2 12.5 21

Establish national and sub-national crop improvement centers and seed bases; seed quality detection centers and test stations for other crops

Selected provinces

Animal and Plant Protection 16 12 5 11.5 12

Establish and improve animal disease monitoring, warning, prevention control, quarantine and supervision, veterinary inspection, technical support.

Selected provinces

Other     2   1.3 Other agricultural projects Selected provincesIV. Improving Production and Living Conditions in Rural Areas 184 176 149 204 219    

Safe Drinking Water 28 18 20 60 64 Provision of safe drinking water with focus on high fluorine and high arsenic content.

All country, with focus on Central and Western regions

Roads and Electricity 66 72 51 62 72.9 Construction of rural roads and extension power to all villages.  

Biogas 10 10 10 25 25 Building biogas digesters Most provincesPoverty Reduction 80 76 68 57 57 Infrastructure construction in poor rural areas Selected provinces Other 502 472 381 404 528    

  Construct and rehabilitate rural boarding schools (improve lodging conditions) Selected provinces

  Construct distance learning teaching stations and computer class rooms. Selected provinces

  Construction of rural vocational schools Selected provinces  Construct rural TV broadcasting stations Selected provinces

 Expand and renovate village clinics, township hospitals, county hospitals, and county maternal and childcare institutions

Selected provinces

  Develop (and construct) farmer wholesale market information systems Selected provinces

154

155

Annex 6: Labor Mobility Programs and Interventions

No. Project Name Launch Year Trainee Number Central Government Input1. Green Certificate Program Pilot in year 1990;

implemented from year 1994

The total number of trainees is 29 million by the end of year 2006; 13 million gained Green Certification

None

2. New type farmer S&T training program （ Evolved from the Green Certificate Program）

2006 300 counties, 10 thousand villages，0.4 million trainees in Year 2006; 600 counties, 20 thousand villages, 0.8 million trainees in year 2007; the goal is 200 thousand villages, 8 million trainees during 11th-5 year plan

0.1 billion Yuan in year 2006; 0.2 billion Yuan in year 2007; 250 Yuan per person in average.

3. A million vocational students project

2006 The goal is to train 1 million students in 10 years; 100 thousand have been trained in year 2006.

No special financial support; belongs to part of other financial support project (financial support for rural professional training schools)

4. Rural practical technique training

Carried out in every year About 20 million None

5. Agricultural S&T entering farmer’s family demonstration project

2005 100 thousand trainees in 100 counties in 2005；200 thousand trainees in 200 counties in 2006；250 thousand trainees in 300 counties in 2007

30 million Yuan in 2005； 50 million Yuan in 2006；60 million Yuan in 2007

6. Farmer’s S&T book-house project

2003 625 in year 2003；1000 in year 2004；471 in year 2005；800 in year 2006.

The total input is 13 million Yuan from year 2003 to year 2007; 4500 Yuan for each book-house in average

7. “National excellent rural talent” medal” project

2000 Encourage 1 group each 3 years: 10 persons in year 2000; 50 in year 2003; 100 in year 2007

2 million Yuan from year 2000 to year 2007 (as special working expenditure)

8. “National agricultural outstanding talent acknowledgement"

2005 Encourage 10 persons per every 2 years, 200 thousand Yuan per person.

The total input is 4 million Yuan from year 2005 to year 2007 for 20 persons

9. Rural labor transfer training “Sunshine Program”

2004 2.5 million in year 2004; 2.8 million in year 2005; 3.5 million in year 2006; 3.5 million in year 2007.

0.25 billion Yuan in year 2004; 0.4 billion Yuan in year 2005; 0.6 billion Yuan in year 2006; 0.9 billion Yuan in year 2007.The total input of central finance is 2.15 billion Yuan from year 2004 to year 2007; bring along above 1.6 billion Yuan input of provincial finance.

156

Annex 7: China 11th Five-Year Program Key Policies and Regulations in Social Protection (2005-2008)

Area Key Policies and RegulationsSocial InsurancePensions Decision on Improving Basic Enterprise Pension

Insurance System (State Council Document No. 38, 2005)

Circular on Pooling Funds in Basic Old Age Insurance for Enterprise Employees at the Provincial Level (MOLSS Document No.3, 2007)

Circular on Further Expanding Financing of Individual Accounts (MOLSS Document No. 6, 2007)

Plan on Piloting Pension Reforms for Civil Servants (approved by the State Council in February 2008)

Proposal on Handing over Former Enterprise Annuity Schemes (MOLSS Document No.12, 2007)

Unemployment insurance Notice of the State Council on Employment Promotion (State Council Document No. 5, 2008)

Notice on the Pilot of Expanding Expenditures of the Unemployment Insurance Fund (MOLSS Document No. 5, 2006)

Work injury insurance Amendment of Work-Related Injury Insurance [draft] Notice on the Implementation of “Safety Plan” for Rural

Migrant Workers and Encouraging Their Participation in Work Injury Insurance (MOLSS Document No. 19, 2006)

Rules of Work Injury Insurance for Rural Migrant Workers in Construction Industry (MOLSS Document No. 44, 2006)

Social insurance administration and financial management

Regulations for Management and Supervision of Social Insurance Funds [draft]

Guidelines for Improving Administration of the Social Security System (MOLSS Document No. 10, 2006)

Notice on Improving the Audit System Applied to Social Insurance Programs (MOLSS Document No. 4, 2005)

Circular on Off-Site Surveillance of Social Insurance Funds (MOLSS Document No. 13, 2005)

National Social Security Fund Interim Guidelines on the Administration of Overseas Investment by the National Social Security Fund (issued 1 May 2005)

Social AssistanceGeneral Social Assistance Law [draft]Rural and urban dibao Circular on Establishing the Minimum Subsistence

Guarantee System in Rural Areas (State Council Document No. 19, 2007)

Circular on Further Increasing Urban/Rural Dibao Benefit Levels to Guarantee the Basic Living of the Poor and Vulnerable (MOF and MOCA, February 2008)

Circular on Properly Solving the Life-Related Problems for Urban Dibao Families (MOCA, August 2007)

Circular on Standardizing Dibao Related Works in Grassroots

157

(MOCA, June 2007)Wubao Working Rules for the Five Guarantees Program (State

Council Decree No. 456, January 2006) Circular on the Establishment of Welfare Houses for

Wubao Beneficiaries (MOCA Document No. 107, 2006) Circular on Guidance on Implementation

(MOCA/NDRC/MOF Document No. 146, 2006) Notice on the Implementation of Sunshine Project about

Improving Service for Wubao Beneficiaries (MOCA Document No. 206, 2006)

Disaster relief 11th Five Year Plan of Comprehensive Disaster Relief (State Council, August 2007)

Working Rules on Dealing with Natural Disasters (MOCA, revised in April 2006)

Support to land-loss farmers Guidelines on Employment Training and Social Protection for Land Loss Farmers (State Council Document No. 29, 2006)

Policies for Land Loss Farmers Participating in the Social Security System (MOLSS Document No. 14, 2007)

Assistance for transient poverty Circular on Further Developing Temporary Assistance System (MOCA Document No. 92, 2007)

EmploymentLabor contracts, worker rights, and dispute resolution

Labor Contract Law (enacted June 2007) Employment Promotion Law (enacted August 2007) Labor Dispute Negotiation and Settlement Law (enacted

December 2007)Migrant labor State Council Opinion on Rural Migrant Workers (State

Council Document No. 5, 2006) Implementation Policies Regarding Social Protection for

Rural Migrant Workers (MOLSS Document No. 15, 2006)

Notice on the Implementation of “Safety Plan” for Rural Migrant Workers and Encouraging Their Participation in Work Injury Insurance (MOLSS Document No. 19, 2006)

Rules of Work Injury Insurance for Rural Migrant Workers in Construction Industry (MOLSS Document No. 44, 2006)

158

Annex 8: Urban Pension System in China: Summary of Major Policy Changes

The following table summarizes the main policy changes introduced in the urban pension system in State Council Document No. 38 (2005), compared to the previous policies laid out in State Council Document No. 26 (1997).

Document No. 26 (1997) Document No. 38 (2005)Individual Account

11percent of individual wage 8percent individual contributions +

3percent employer contributions

Funding individual account with 8percent of individual wage

From individual contributionsBenefit Basic pension + individual account

pension Basic pension + individual account

pension Linked to the length of contribution

* Basic pension

Basic pension = average local wage 20percent

Basic pension = (average local wage + average individual indexed wage as the base for contribution) / 2 contribution length (year) 1percent

* Individual account pension

Individual account pension = saving amount in individual account / 120

Individual account pension = saving amount in individual account / delivery length (month)

Delivery length is determined according to average life expectancy for urban residents, retirement age, interest rate, etc.

Coverage The participation of self-employed and informal employed workers is optional

It is up to the provincial government to determine the specific policies for self-employed and informal employed workers

Self-employed and informal employed worker are required to make contributions

Total contribution = local average wage 20percent

The benefit level is the same as for enterprise employees

159

Annex 9: China 11th 5YP: Key Policies on Health (2005-2008)

Collection of Recent Policy Documents in Health

Area Key Policies and RegulationsHealth Financing and ProtectionCooperative Medical System

State Council Notice on Forwarding Suggestions of Ministry of Health on Establishing New Cooperative Medical System (State Council [2003] No.3)

State Council Notice on Forwarding Suggestions of Ministry of Health on Further Strengthening the pilot of New Rural Cooperative Medical System (State council [2004] No.3)

Notice on Speeding up the Pilot of New Cooperative Medical System (MoH, Rural Health [2006] No.13)

Ministry of Finance and Ministry of Health Notice on Adjusting Payment Methods of Central Government Subsidy to New Cooperative Medical System (MoF, MoCA [2007] No.5)

Suggestions on Improving Pooling and Reimbursement Scheme of New Cooperative Medical System (MoH Rural Health [2007] No.253)

Suggestions of Ministry of Health on Establishing Information System for New Rural Cooperative Medical System (MoH Rural Health [2006] No.453)

Ministry of Health and Ministry of Finance Notice on Implementation New Rural Cooperative Medical System in 2007 (MoH Rural Health [2007] No.82)

Notice on Implementation New Rural Cooperative Medical System in 2008 (MoH Rural Health [2008] No.17)

Urban Employee basic Medical Insurance

Suggestions on Encouraging Staff from Mixed Ownership Enterprises and Non-Public Ownership Economic Organizations to Join Medical Insurance (MoLSS [2004] No. 5)

Notice on Expanding the Coverage of Medical Insurance for Migrant Workers (MoLSS [2006] No.11)

Suggestions on Encouraging Medical Insurance Beneficiaries to Make Full Use of Community Health Services (MOLSS [2006] No.23)

Urban Residents Notice on Covering Urban Residents with Difficulties into Basic Medical Insurance for Urban Residents (MoCA [2007] No.15)

State Council Suggestions on Experiment Development of Basic Medical Insurance for Urban Residents (State Council [2007] No. 20）

Suggestion on Management Service of Basic Medical Insurance for Urban Residents (MoLSS [2007] No.40)

State Council establishing Joint Conference of Basic Medical Insurance Department for Urban Residents( NDRC Web 05/18/2007）

Notice on Distributing Suggestions on Management Service of Basic Medical Insurance for Urban Residents (MoLSS [2007] No.34)

160

Medical Assistance Suggestions on Implementing Rural Medical Assistance (MoCA [2003] No. 158)

Ministry of Finance and Ministry of Civil Affairs Notice on Distributing Provisional Measures on Rural Medical Assistance Fund Management (MoF, MoCA [2004] No. 1)

Suggestions on Strengthening Management of Urban Medical Assistance Fund (MoF, MoCA〔2005〕No.39)

State Council General Office Notice on Forwarding Suggestions of Ministry of Civil Affairs regarding Setting up Urban Medical Assistance System Pilots (State Council[2005] No.10)

Ministry of Civil Affairs, Ministry of Health and Ministry of Finance Notice on Speeding up Rural Medical Assistance Work (MoCA [2005] No. 121)

Health Sciences DeliveryRural Community Decision of the Central Committee of Communist Party of

China and the State Council on Further Strengthening Rural Health Work (CCCP〔2002〕No. 13)

Fundamental Idea and Overall Objective for Pushing Forward the Rural Health Reform and Development During the 11th Five-Year Plan 2005

Suggestions of the Central Committee of Communist Party of China and the State Council on Pushing Forward the Building of Socialist New Countryside (CCCP〔2006〕No. 1)

Notice on Distributing the Plan on Rural Health Service System Building and Development (MoH〔2006〕No.340)

Suggestions on Rural Health Subsidy Policy (MoF〔2003〕No. 14)

Notice on Distributing Suggestions on Building Village Clinics with Central Budgetary Special Funds(Treasury Bond) (MoH [2007] No.138)

Urban Community Suggestions of the State Council on Developing Urban Community Health Service (State council〔2006〕No. 10)

Notice on Distributing Suggestions on the Setting and Staffing of Urban Community Health Service Institutions (Personnel Ministry [2006] No.96)

Notice on Basic Standards Regarding Urban Community Health Service Center and Station (MoH [2006] No.240)

Notice on Management (trial) of Urban Community Health Service Institutions (MoH [2006] No.239)

Suggestions of Ministry of Health and State Administration of Traditional Chinese Medicine on Fully Playing the Role of Traditional Chinese Medicine in Urban Community Health Service (Bureau of Traditional Chinese medicine〔2006〕No.36)

National Development and Reform Commission and Ministry of Health Suggestions on Strengthening price management of drug and Service of Community Health Service Institutions (NDRC [2006] No.305)

Ministry of Finance, National Development and Reform Commission and Ministry of Health Suggestions on Urban Community Health Service Subsidy Policy (MoF [2006] No.61)

161

Suggestions on Public Hospitals Supporting Community Health Service (MoH [2006] No.244)

Suggestions on facilitating BMI enrollees to utilize Community Health Service (MoLSS [2006] No.22)

Suggestions on Strengthening Human resources for Community Health Service (MoH [2006] No.69)

Notice on Distributing Medicine Catalogue for Community Health Service Institutions (MoH [2007] No.251)

Human Resources Regulation Concerning New Staff in Urban Medical Institutions Paying Regular Service to Rural Areas after Having Obtained Practicing Certificate of Doctors (MoH [2004] No.115)

Suggestions of Ministry of Health on Strengthening Health Staff Team-building During 11th Five-year Plan (2006)

Guidance Suggestion on Strengthening Health Vocational Education (2006)

Food safety and Pharmaceuticals Drug Administration Law (President of People’s Republic of

China Decree No. 45) 2001 Implementation Regulation on Drug Administration Law

(State Council Decree 360) 2002 Regulation on the Management of Narcotic Drugs and

Psychotropic Substances (State Council Decree No. 442) 2005

Regulation on the Management of Vaccine Circulation and Preventive Inoculation (State Council Decree No. 434) 2005

Special Regulation of State Council on Strengthening Supervision and Management of Food Safety (State Council Decree No. 503) 2007

Management Methods on Imported Medicine (Trial) (State Food and Drug Administration Order No.22) 2005

Management Methods on Registration of Preparation in Medical Institutions (Trial) (State Food and Drug Administration Order No.22) 2005

Management Methods on pharmaceutical Circulation Supervision (State Food and Drug Administration Order No.26) 2006

Management Methods on drug recall (State Food and Drug Administration Order No.29) 2007

Management Methods on Medicine Registration (State Food and Drug Administration Order No.28) 2007

Notice of Ministry of Health Concerning Further Strengthening Centralized Procurement and Management of Medical Appliances (MoH [2007] No.208)

Notice on Distributing Management Methods on Good Non-clinic Laboratory Practice(State Food and Drug Administration [2007] No.214)

Hearing Rules for State Food and Drug Administration (Trial) (State Food and Drug Administration Decree No. 23) 2006

Suggestions on Furthering Rectifying Price Order in the Medicine and Medical Service Market (NDRC [2006] No.912)

Notice on Distributing the Implementation Suggestions on the Special Regulation of State Council Regarding

162

Strengthening Food Safety Supervision and Management (State Food and Drug Administration [2007] No.541)

Notice on Strengthening Price Management in Medical Institutions and Containing Medicine Price (MoH〔2008〕No.6)

Notice of Ministry of Health General Office on Distributing the Review System Arrangement (Trial) of Ministry of Health on the Use of Class A Large Medical Equipment (MoH [2008] No.8)

Notice on Strengthening Price Regulation of Medical Institutions and Containing Irrational Increase of Medicine Price(MoH [2008] No.6)

Public Health Regulation on the Urgent Handling of Public Health

Emergency (State Council Decree No. 376) 2003 Regulation on Vaccine Circulation and Preventive

Inoculation (State Council Decree No.434) 2005 Regulation on AIDS Prevention and Treatment (State

Council Decree No. 457) 2006 Nurses Regulation (State Council Decree No. 517) 2008 Decision of the Central Committee of Communist Party of

China and the State Council Concerning Health Reform and Development (Zhong Fa〔1997〕No. 3)

Decision of the Central Committee of Communist Party of China on Major Issues in Building a Harmonious Socialist Society 2006

Notice on Distributing Management Methods on Maternity and Child Health Institutions (2006)

Long -term Development Plan 10th Five-year Programme for Health 11th Five-year Programme for Health Development 11th Five-year Plan for State Food and Drug Safety 11th Five-year Plan for Development of Chinese Traditional

Medicine China’s Health Human Resources Development Programme

2001-2005 National Environment and Health Action Plan (2007-2015) Development Programme for China’s Rural Primary Health

Care (2001-2010) Action Plan for Nation-wide Farmers Health Promotion

(2006-2010） Action Plan for China’s Prevention and Treatment of AIDS

(2006-2010) Plan for Building and Developing Rural Health Service

System

163

Annex 10: Key Educational Indicators in 2006

Key Education Indicators China High income Middle income

East Asia & Pacific

Education inputs

% of public education expenditure to GDP

3.01 5.4 4.3 3.5

Primary school pupil-teacher ratio

19 16 20 19

Gross enrollment rate

Preprimary 39 78 41Primary 111 101 112 111Secondary 76 101 78 72Tertiary 22 67 27 20

Education outcome

Adult literacy rate 95(M) 87 (F) 99(M) 98 (F) 93(M) 87(F) 95(M) 87 (F)

Source: World Development Indicators 2008, Educational Statistics Yearbook of China, 2006)

164

Annex 11: Key policies and regulations in China Related to Resources and environment objectives in China’s 11th Five Year Plan

Area Key relevant policies and regulationsPollution Control and Circular Eeconomy

Law on Environmental impact assessment, 2003 (中华人民共和国环境影响评价法, 2003)

Rules on collection and management of pollution discharge fee, 2003 (排污费征收使用管理条例, 2003)

Law to promote cleaner production, 2002 (中华人民共和国清洁生产促进法 , 2002-06-29)

Management procedure for environmental protection of investment project, 1990 ( 建设项目环境保护管理程序， 1990)

Water Pollution

Law on water pollution prevention and abatement, 1984 (中华人民共和国水污染防治法, 1984）

Air Pollution Law on air pollution prevention and control, 2000 (中华人民共和国大气污染防治法 , 2000-04-29)

Law on energy conservation, 2007 (中华人民共和国节约能源法 ,2007-10-30)

Solid Waste Law on solid waste pollution prevention and control, 2004 (中华人民共和国固体废物污染环境防治法, 2004-12-29)

Water Resources Efficiency

Law on water, 2002 (中华人民共和国水法 ,2002） Rules regarding issuance of water uptake permit and water resources fee, 2006

(取水许可和水资源费征收管理条例》,2006) Regulation for the management of water uptake permit, 2008 (取水许可管理办

法 ,2008)

Forestry and Eco-system

Decision of the State Council on Enhancing forestry Development, 2003 (中共中央、国务院关于加快林业发展的决定)

Law on Forestry, 1984 revised in 1998 (中华人民共和国森林法 , 1998 修订 ) Law on prevention and combating desertification (中华人民共和国防沙治沙法,

2003-12-03)