EAI Commentary No. 18: China's Development Direction as Seen Through the 4th Session of the 11th National People's Congress

Professor Lee Jeong-nam holds a Ph.D. in Chinese Politics from the School of Government at Peking University and is currently a professor at the Asiatic Research Institute of Korea University.

The Lianghui, Garnering Global Attention

The 4th session of the 11th National People's Congress (NPC), China's highest legislative body, and the 4th session of the Chinese People's Political Consultative Conference (CPPCC), a consultative body, were held for over ten days from March 3rd to March 14th. These meetings, commonly referred to as the 'Lianghui' (Two Sessions), are known as important forums for gauging China's domestic and foreign policy directions, as well as its economic policies. Notably, this year's sessions garnered unprecedented international media attention, with approximately 3,000 foreign correspondents covering the events.

The primary reason for this heightened attention is the significant increase in China's global influence. Over the past three decades of rapid growth, China surpassed Japan in Gross Domestic Product (GDP) in 2010 to become the world's second-largest economy. Furthermore, it has emerged as the world's largest manufacturing nation, overtaking the United States in manufacturing GDP. China also ranks first in global exports and second in imports, and holds the largest foreign exchange reserves, solidifying its position as a 'G2' nation. Consequently, the NPC's decisions on China's socio-economic policies carry increasing weight internationally. Moreover, the 12th Five-Year Plan for Economic and Social Development, which will guide China's socio-economic development for the next five years, was decided at this session. The world's keen interest stems from the significant impact China's development policies will have on the global economy and politics.

Another factor contributing to the global interest is the expectation that the NPC might initiate political reforms in response to growing domestic issues. The rapid growth has brought about severe corruption, deepening social inequality, environmental pollution, inflation, and high unemployment rates, leading to widespread public discontent. Influenced by the 'Jasmine Revolutions' in the Middle East and North Africa, there was anticipation that China might seek a series of changes through political reform during this NPC session.

Reflecting its increased international standing and the global attention it commands, the atmosphere at the NPC became notably more serious during its preparation and proceedings. For instance, the draft of the 12th Five-Year Plan for Economic and Social Development, a key agenda item, was developed over an extended period through extensive evaluation and discussion, involving a wide range of think tanks, including government research institutions, universities, and private research institutes, under the leadership of the National Development and Reform Commission since March 2008. Public opinion was also solicited through the internet. The session itself proceeded in a serious manner, with criticisms and constructive policy proposals directed at government officials regarding issues such as housing, healthcare, education, and tax reductions. This indicates that the NPC is moving away from its past reputation as a mere 'rubber stamp' for Party decisions and is gradually regaining its functions of legislation, oversight, and representation.

The most critical issue at this session was enhancing the 'happiness' of the populace by addressing livelihood concerns. Specifically, the session reviewed and approved the 12th Five-Year Plan for Economic and Social Development, formulated policies to curb inflation and stabilize prices, addressed income disparity, improved social (crisis) management systems, and focused on social security and livelihood issues. International attention was also drawn to the appreciation of the Renminbi and political reform. Premier Wen Jiabao clearly stated in his work report that China would focus its policies on resolving income disparity and livelihood issues by transforming its economic growth model. This direction is based on the judgment that livelihood issues, such as income disparity, corruption, and social welfare, are decisive factors for the success of China's future reforms and opening-up, and failure to address them could pose a fatal obstacle to sustainable development. Examining the issues raised at this NPC session, categorized into four areas—economy, society, domestic politics, and foreign policy—reveals the following:

Transformation of the Economic Growth Model: From Quantitative to Qualitative Growth, From Uneven to Balanced Growth

In terms of economic policy, a significant outcome of this NPC session was the shift from a quantitative growth-oriented policy based on the theory of unbalanced development to a qualitative growth-oriented policy based on the theory of balanced development. The 12th Five-Year Plan for Economic and Social Development, passed on the 14th, aims to lower the annual growth rate to around 7 percent for the next five years, prioritize qualitative growth and domestic demand, and restructure industries. The plan proposes to increase the share of seven strategic industries—energy conservation and environmental protection, information technology, biotechnology, high-tech equipment manufacturing, new energy, new materials, and new energy vehicles—from the current 2 percent to 8 percent by 2015 and 15 percent by 2020 (approximately 10 trillion yuan).

According to the plan, China is currently facing severe problems such as resource scarcity and environmental degradation due to its continued reliance on quantitative investment and export-driven economic growth. Socially, various issues have emerged, including widespread corruption, widening income disparities between classes, urban and rural areas, and regions, rising costs for healthcare, education, and housing, inadequate social security systems, and employment pressures. To address these problems, the plan emphasizes adhering to the Scientific Outlook on Development, transforming the growth model, curbing quantitative investment and net exports, promoting domestic demand-oriented policies, expanding employment in the service sector, increasing social welfare such as healthcare, education, and elderly care, and controlling real estate prices to boost consumption.

This policy direction was not entirely new; it was already outlined in the 11th Five-Year Plan for Economic and Social Development, passed at the 4th session of the 10th NPC in 2006. The 11th Five-Year Plan proposed the 'transformation of the economic growth model' (转变经济增长方式) as a means to address the fundamental challenges facing the Chinese economy: 'sustainable growth' and 'mitigation of development gaps.' This was because the unbalanced development strategy, based on the 'enrich the rich first' (先富论) principle, had led to quantitative economic growth but also severe distributional imbalances. Consequently, a development path was needed that would allow for a more equitable distribution of the benefits of economic growth, moving beyond mere quantitative expansion. The concerns of the Chinese leadership regarding a new economic growth model based on the Scientific Outlook on Development and the resulting policy changes were already comprehensively reflected in the 11th Five-Year Plan approved at the 10th NPC in 2006.

The shift to a new growth model based on the Scientific Outlook on Development, as proposed in the 11th Five-Year Plan, signifies important changes in several aspects. First, it represents a transition from an export- and foreign investment-driven economic growth strategy to a domestic demand-driven one. China's rapid economic growth thus far has been primarily fueled by the input of basic factors of production—capital, labor, and natural resources—and the high growth of foreign trade, rather than productivity gains based on technological innovation. Furthermore, excessive reliance on exports created imbalances with the domestic economy and posed potential national security risks. To address these issues, the policy aims to shift from expanding investment to fostering economic growth through consumption and to transition from an 'export-driven' growth strategy to a 'domestic demand-driven' one, reducing reliance on foreign trade.

Second, the policy has increased the emphasis on energy efficiency and environmental protection. This is due to growing concerns about resource depletion and environmental damage resulting from China's high-speed economic growth, which has relied heavily on the input of natural resources and pursued development policies that disregarded environmental sustainability. Third, the policy aims to shift from unbalanced development to balanced development to address the widening social polarization, which has become a serious issue. While Deng Xiaoping's 'enrich the rich first' strategy was a significant driver of rapid growth, it also led to widening disparities between coastal and inland regions, urban and rural areas, industry and agriculture, and different social classes. As these economic and social imbalances and polarization deepened, issues of social cohesion and crisis management emerged as critical challenges.

Fourth, the policy aims to advance industrial upgrading based on the 'new industrialization strategy' (新型工业化道路). The industrial upgrading proposed in the 11th Five-Year Plan has been a consistent theme since the 1990s and aligns with the new industrialization strategy put forth by Jiang Zemin at the 16th Party Congress in 2002. It was again a significant agenda item at this NPC session.

The transformation of the economic growth model outlined in the 12th Five-Year Plan is a continuation of the development strategy proposed in the 11th Five-Year Plan in 2006 and is consistent with the emphasis on the Scientific Outlook on Development and the transformation of the growth model articulated at the 17th Party Congress. However, the 12th Five-Year Plan presents more concrete policy alternatives and demonstrates a stronger commitment to implementation, given the rapidly evolving domestic and international circumstances. The global financial crisis of 2008 severely impacted China's exports, and the social problems arising from uneven socio-economic development, coupled with growing public discontent, have made the transformation of the economic growth model and the expansion of domestic demand more urgent.

Resolving Social Instability Through the Resolution of Livelihood Issues

Current Chinese society is experiencing increasingly severe wealth disparities and social conflicts, consequences of the growth-at-all-costs development policies of the past. Ji Baocheng, President of Renmin University of China, pointed out during this meeting that the income gap between China's wealthiest and poorest strata has reached 40-fold and is increasing by 1.5 percent annually. He also noted that a small number of wealthy households own 40 percent of the nation's total assets, and this situation is far more severe in urban areas than in rural ones. Furthermore, corruption is identified as a significant factor exacerbating these income disparities. Wang Xiaolu, a researcher at the China Reform Foundation, points out that so-called corrupt income, or 'grey income,' is a factor that further widens the wealth gap. According to him, China's 'grey income' in 2008 amounted to 5.4 trillion yuan, generated through corruption, rent-seeking activities, and the misappropriation of public funds. Consequently, popular protests stemming from dissatisfaction with these social issues have rapidly increased, with the number of mass protests in China exploding from 8,709 in 1993 to 90,000 in 2006, and exceeding 90,000 annually from 2007 to 2009.

Crisis management of social instability factors and the issue of social integration have now emerged as the most critical agenda items in China's socio-economic development process. Moreover, observing the recent events in the Middle East, Chinese leaders emphasize that China's situation is different and that China will follow a path of development with Chinese characteristics, yet they inwardly worry that the factors of instability in Chinese society might erupt into widespread public anger, leading to a severe political crisis. It is in this context that the Chinese government, under the banner of a 'Harmonious Society,' aims to transition its economic growth model to sustainable growth and focus its efforts on enhancing worker happiness through domestic demand-led growth and improving the income distribution structure for workers.

To achieve these goals, the Chinese government is proposing various alternatives. Firstly, it aims to increase the minimum wage by over 13 percent annually for the next five years, raising it to over 40 percent of the average wage for employees in the respective regions. Additionally, the 2011 fiscal budget report, released during this meeting, increased central government spending on education, healthcare, social security, employment assistance, housing guarantees, and culture—areas directly related to people's livelihoods—by approximately 18.1 percent. The total expenditure on livelihood issues was allocated to account for about two-thirds of the central government's fiscal expenditure.

Extremely Restrained Remarks on Political Reform and Democracy

Contrary to international expectations, remarks on political reform were highly restrained at this National People's Congress (NPC). This is evident in the fact that while democracy was mentioned over 60 times at the 17th Party Congress in 2007, it was only mentioned three times in the work report of this NPC.

Furthermore, China's key political leaders at this NPC unequivocally stated their opposition to Western-style political reform and their commitment to a path of political development with Chinese characteristics. For example, on March 9, Shen Deyong, Executive Vice President of the Supreme People's Court, responded to netizens' questions by stating, "The Western separation of powers is unsuitable for China; the judiciary must exercise its trial power independently and fairly based on law, under the leadership of the Party and the supervision of the NPC," thus opposing the pursuit of judicial independence based on the Western tripartite system. Additionally, Wu Bangguo, Chairman of the NPC Standing Committee, clearly stated in his work report that China will not pursue the cyclical power transfer among multiple parties, pluralization of guiding ideologies, separation of powers, bicameralism, federalism, or privatization. Even Wen Jiabao, who is considered to hold the most moderate stance on political reform and democratization among Chinese political leaders, reiterated his previous year's assertion that political reform is essential for economic reform and that economic reform cannot succeed without it. However, he explicitly defined the core of political reform at the current stage as the eradication of the soil for corruption, thereby clearly rejecting discussions on political reform centered on issues such as the implementation of elections or a multi-party system.

Indeed, the Chinese government's stance on political reform can also be fully confirmed through its preemptive suppression of street protests attempted in major cities via the internet, fueled by the Jasmine Revolution. The Chinese government mobilized tens of thousands of police officers to preemptively block street protests and simultaneously mobilized the Party's main official newspapers and their affiliates—such as the People's Daily, Beijing Daily, Liberation Daily, and Global Times—to repeatedly emphasize that economic development cannot be achieved without social stability and that China must not descend into a chaotic situation like Libya. Moreover, it was pointed out that China's situation fundamentally differs from the Middle East in two aspects. First, as China has achieved rapid growth over the past 30 years to become the world's second-largest economy, Chinese people, filled with pride, trust the Communist Party and desire stability. Second, unlike the Middle East, the lifelong tenure of leaders has been effectively abolished in China, and power transitions are occurring. The Chinese Communist Party is attentive to the various demands of the masses and is making efforts to resolve various social issues. In this context, it is argued that China will never follow the path of the Middle East.

Seeking a Foreign Policy Direction Centered on Domestic Issues

The extreme paucity of remarks on foreign policy and security was also a characteristic of this session. Notable points include the upward adjustment of the defense budget increase from 7.5 percent last year to 12.7 percent this year, and the emphasis on 'military-civil fusion development' (军民融合式发展), which posits that economic construction and military construction must proceed together. However, the 12.7 percent increase in military spending is not significantly different from the average annual increase over the past 12 years. Moreover, there is room for debate regarding the decisive significance of this defense budget increase, as the budgets for the 'three rural issues' (agriculture, rural areas, and farmers), as well as for social crisis management and public security in areas like education, healthcare, and housing, exceeded the defense budget in the 2001 budget allocation. Meanwhile, regarding the pressure from the United States and the international community to appreciate the Renminbi, China reiterated its existing principled stance that it does not consider short-term appreciation of the Renminbi and will pursue it gradually over the long term. Concurrently, it clearly expressed its intention to escape international pressure by gradually promoting domestic consumption and opening up its capital markets.

What, then, are the implications of this policy direction, which focuses on livelihood issues, for China's foreign policy? Driven by confidence from its economic rise despite the aftermath of the 2008 global financial crisis and a sense of crisis from being strategically encircled by forces led by the United States, China has pursued an active and assertive foreign policy over the past year. However, with the increased emphasis on resolving livelihood issues, China is likely to shift towards a foreign policy that prioritizes economic development and social crisis management, seeking peaceful conditions for their resolution through cooperative and friendly relations with neighboring countries, rather than adopting an active and assertive stance that leads to conflict.

This can also be seen in an article published by Wang Jisi, a prominent Chinese international relations scholar and Dean of the School of International Studies at Peking University, in the March-April 2011 issue of Foreign Affairs. Wang Jisi emphasized that since the current Chinese government is presenting a national grand strategy based on the Scientific Outlook on Development and the theory of a Harmonious Society domestically, diplomatic work must also be closely linked to domestic issues. He further argued that in this context, China should focus on creating a peaceful international environment by pursuing peaceful and cooperative relations with neighboring countries, rather than adopting an aggressive and confrontational stance. This perspective aligns with the remarks made by President Hu Jintao in July 2010 and State Councilor Dai Bingguo, who is responsible for foreign affairs, in December 2010, both stating that China's foreign affairs must contribute to safeguarding national sovereignty and security, ensuring the stability of its political system, and achieving sustained economic development.

From this perspective, a series of changes can be anticipated in South Korea-China relations. As is well known, the relationship between South Korea and China has been strained due to significant differences in their positions regarding sanctions against North Korea and naval exercises along the western coast, following the Cheonan incident and the Yeonpyeong Island shelling last year. However, due to the shift in China's foreign policy towards focusing on livelihoods and maintaining friendly and cooperative relations with neighboring countries, exchanges and cooperation between South Korea and China are expected to expand again. This could provide favorable conditions for South Korea to secure cooperation with China on issues such as North Korea, the North Korean nuclear issue, and various pending matters in South Korea-China relations.

Conclusion

For a long time, China's National People's Congress (NPC) and the Chinese People's Political Consultative Conference (CPPCC) did not fully fulfill their functions. However, with the implementation of reform and opening-up policies, the NPC and CPPCC have begun to recover their original functions and are playing increasingly important roles. While questions are sometimes raised about the extent to which the NPC, as a representative body of the people, can truly represent public opinion, it cannot be denied that the NPC has significantly strengthened its legislative and supervisory functions through various institutional reforms in recent years, unlike its pre-reform and opening-up era role which primarily served to legitimize the regime, integrate the system, and mobilize the populace for regime maintenance. Simultaneously, as China's national strength grows, the activities of the NPC have become a major focus of global attention, further increasing its importance.

Of course, the various policy proposals put forth at the 4th session of the 11th NPC are likely to face numerous hurdles before they can be effectively implemented and yield results. First, although the average annual economic growth rate has been adjusted to below 7 percent during the 12th Five-Year Plan period to maintain domestic demand expansion strategies and a stable growth trajectory, it will be difficult for local governments, which are growth-oriented, to support this. Second, although the focus is on improving livelihoods by emphasizing domestic demand expansion, strengthening income distribution, and resolving income disparities, the fundamental issue of how to foster the expansion of the middle class and increase the income of low-income groups remains a challenging task. Third, the potential for increased unemployment due to the contraction of growth resulting from the transformation of the economic growth model cannot be ruled out.

The Chinese government perceives itself to be at a critical strategic juncture due to changes in both domestic and international circumstances. To successfully navigate the second phase of systemic transition and reform, China must overcome many obstacles. If China can successfully implement the transformation of its economic growth model, decided upon during the recent 'Two Sessions' (Lianghui), and realize a harmonious society, thereby resolving the various social problems it currently faces, it can establish its status as a true 'G2' through sustained high-speed growth. However, it is not yet possible to definitively view the success of the so-called 'development model with Chinese characteristics,' which aims to simultaneously achieve economic growth and equitable distribution, with unwavering optimism.■

The East Asia Institute (EAI) is a core research institution for the MacArthur Foundation's 'Asia Security Initiative' program and receives financial support. [EAI Commentary] aims to provide in-depth analysis and practical alternatives through a balanced perspective on major domestic and international issues. When citing [EAI Commentary], please be sure to credit the source. This manuscript represents the personal views of the author and does not necessarily reflect the position of the East Asia Institute.