China Inc: Social responsibilities and the new five-year plan

China Inc: Social responsibilities and the new five-year plan

Tom Miller, Ethical Corporation

6th June 2006

Market-based pricing of electricity, water and refined oil products are not on the government's agenda, despite the potential impact of such plans on a greener China.

In March, the world's largest annual general meeting wrapped up for another year. With a beaming chairman by his side, the chief executive proudly announced near-record results to happy shareholders, who applauded the management on another fine year's work. Turning to the year ahead, the chief executive called on shareholders to approve a restructuring package to ensure the long-term health of the corporation.

The representatives at this year's meeting of the Chinese parliament were only too happy to oblige Chinese premier Wen Jiabao, chief executive of China Inc. The new Five Year Plan, ratified by the National People's Congress last month, outlines an economic model based on greater resource efficiency and "balanced" growth. Although the new plan envisages average annual growth of 7.5% until the end of 2010, it stresses that the blind pursuit of high GDP growth for its own sake must be abandoned.

New countryside

Two key policies are to build "a new socialist countryside" and "to promote economical and rational use of resources". Tackling the growing inequalities between China's booming cities and the impoverished countryside, Wen argued, would entail "encouraging consumption in rural areas" - important if China is to shift to more environmentally sustainable, consumption-led growth.

Does this mean we are about to witness a sudden shift away from investment-driven, resource-hungry growth, and an end to the fear that China will gobble up the world? The short answer is no. The surest way for the government to raise rural incomes is to continue pushing farmers into manufacturing and construction work in the cities. As China continues to urbanise, it will remain investment-driven - and dirty - for many years to come.

Nevertheless, the new plan does mark a welcome shift in priorities. Rural fury at illegal land seizures by rapacious officials and developers, together with mounting frustration at polluted rivers and drinking water, helped push the official number of violent protests to 87,000 last year, up from 74,000 in 2004 and 58,000 in 2003. The Communist Party-led government knows it must attend to social and environmental responsibilities to ensure its very survival.

Rural economy

China's farmers have been sucked dry by the state for centuries, and they continue to get a raw deal. Education, healthcare and social services in much of the countryside remain primitive at best, and sometimes non-existent. The average farmer earns just $405 a year, barely more than a dollar a day and less than a third of the average urban wage. According to the United Nations Development Programme, China's "urban-rural income inequality is perhaps the highest in the world".

Much of the resentment in the countryside is caused by cash-starved local governments charging ad hoc taxes to fill their own depleted coffers. The central government is responding by abolishing agricultural tax throughout the country (for the first time in 2,600 years) with the local shortfall being made up by transfers from the central government. Beijing will also continue to crack down on local officials charging "unlawful fees".

Rural education rising

Over the next five years, central expenditure on rural education will rise by more than $25 billion, guaranteeing nine years of free education to every rural child in China's poor western provinces. Cash for rural infrastructure projects, such as road building, and direct subsidies to China's impoverished grain farmers will also come out of the central budget.

But the government still needs to dig deeper. Although rural spending this year should hit $42 billion, a 14.2% increase on 2005 and well over the official 9.7% budgeted increase in total central government expenditure, analysts expect real total spending in 2006 to grow by 15% or more. "It is most unlikely that rural or social expenditure growth will be allowed to run ahead of overall expenditure growth," says Arthur Kroeber, managing editor of the China Economic Quarterly.

The state is investing just $2.5 billion in renovating hospitals and upgrading equipment over the next five years - significantly less than the cost of building the high-speed Maglev rail line between Shanghai and Hangzhou, two of the nation's richest cities. And farmers participating in trials of a rural co-operative health system, to be extended to 40% of all counties this year, will be allocated an allowance of just $5 per head.

One policy change that would both help to raise rural incomes and give farmers greater power to protect their land from illegal seizure would be to create a genuine land market in the countryside. Currently, farmers hold their land on 30-year leases from the local village collective and have no right to sell or sub-let; if they leave the farm, the land returns to the collective.

Transferring property rights to individual farmers would allow them to sell their land at its commercial value, and head off to the cities with cash in their pockets. During his annual press conference at the NPC, Wen declared: "We must enforce land protection and farmers' right to farm, and give due compensation for seized land." But he refused to countenance individual land rights. In the new socialist countryside, giving farmers financial control over their lives remains an ideological leap too far.

Environment

One of only two key numeric targets in the new Five Year Plan is to reduce energy consumption per unit of GDP by about 20% by the end of 2010. Last year, China consumed the equivalent of 2.2 billion tonnes of coal, using well over one tonne of coal to produce every $1,000 of GDP. This year, the government hopes to push energy consumption per unit of GDP down by 4%.

Premier Wen Jiabao told NPC delegates that a mixture of industrial upgrading, technological innovation and stricter enforcement of environmental regulations would help to control pollution and increase energy efficiency. But Jiang Weixi, vice-chairman of the state planning commission, admitted to journalists that the 20% efficiency target would be "difficult to realise".

There are already a number of efficiency standards in place on the big three users of energy and natural resources - the power, building and automotive industries - that do have some bite. Further taxes have been placed on big, fuel-guzzling vehicles, while taxes on small cars have been reduced. A new 5% levee on disposable wooden chopsticks is intended to persuade diners to buy the reusable, plastic variety, and thus slow logging in south-east Asia.

Failings not addressed

Although well intentioned, such government policies do not address the major institutional failing that prevents environmental regulations from being enforced. As long as government officials are judged solely on the rate of GDP growth in their localities, environmental targets will not be met. State planners are working on a "green GDP" measure to incorporate into the evaluative criteria used for promoting officials, which should at last provide them with an incentive for closing polluting factories. But no firm mention of the plan was made at this year's meeting.

Another problem in the fight against pollution and resource inefficiency has long been the weakness of the State Environment and Protection Authority (Sepa), which is both seriously understaffed and underfunded. Here some progress has been made. Last year, Sepa inspected more than 43,000 enterprises, sanctioning nearly 30,000 for environmental infringements and shutting down 2,609.

Zhou Shengxian, the agency's new boss, said the concept of "scientific development" - the government's new pet phrase for describing socially and environmentally responsible development - was a "powerful weapon" in Sepa's fight to change China's irresponsibly gung-ho growth model. "Prosperity at the expense of the environment is superficial," Zhou said. "It merely delays disorder."

Yet, if the government was genuinely determined to move beyond a resource-intensive investment model, one simple policy change would do more to persuade consumers of the need to save resources than rafts of new environmental regulations: market-based pricing of electricity, water and refined oil products. Ministers are fond of talking about the need for pricing reform, but remain too scared of social unrest to do anything about it. Deregulation of energy prices, which remain capped at artificially low prices, will be the true test of China Inc's commitment to a greener model of economic growth.

Key facts:

- Ten provinces are already trying to measure and report on "green GDP", which is at the heart of China's latest five-year plan
- China uses three times as much energy per unit of GDP as the US and nine times as much as Japan
- Beijing wants to cut energy intensity by 20 per cent over five years

Suggestions for change:

1) China should "consider implementing the requirements of Kyoto. By doing this, China would acknowledge its responsibility as the world's second-biggest carbon dioxide polluter".

2) China's leaders could create an internal emissions trading scheme, run according to its own rules. Piloted in the Pearl River Delta and Hong Kong, it could become the world's biggest within a decade.

3) China must leap into the hybrid age and then the hydrogen era for car engines.

Source: Global Institute for Tomorrow, a pan-Asian think-tank www.globalinstitutefortomorrow.org

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