Thoroughly Applying the Strategy of Boosting Domestic Demand

From: English Edition of Qiushi Journal Updated: 2012-07-04 14:40
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At the Central Economic Work Conference that was held recently, General Secretary Hu Jintao and Premier Wen Jiabao both delivered important speeches. In addition to analyzing the current international and domestic economic situations and giving a summary of our economic work in 2011, their speeches also outlined the overall arrangements for our economic work in 2012, setting forth general requirements, guiding policies, and major tasks. Here, I would like to talk about some views in regard to implementing the guiding principle of the Central Economic Work Conference and thoroughly applying the strategy of boosting domestic demand during the process of reform and opening up.

I. Continuing to balance the relationship between speed, structure and prices under new circumstances to create favorable conditions for the thorough application of the strategy of boosting domestic demand during the process of reform and opening up

The Central Economic Work Conference emphasized that the key theme of economic and social development in 2012 must be to make progress while maintaining stability. We need to comprehensively apply the guidelines set forth at the Seventeenth National Party Congress and the Third, Fourth, Fifth, and Sixth Plenary Sessions of the Seventeenth CPC Central Committee, take Deng Xiaoping Theory and the important thought of Three Represents as our guide, and thoroughly implement the Scientific Outlook on Development. We need to continue to implement a proactive fiscal policy and a prudent monetary policy, maintain the continuity and stability of macroeconomic policies, and make our macro-control more targeted, flexible and forward-looking. We need to keep a sound balance between maintaining steady and rapid economic growth, adjusting the economic structure, and regulating inflation expectations, so as to accelerate the transformation of the pattern of economic development and the adjustment of the economic structure. We need to focus our efforts on boosting domestic demand, strengthening our capacity for independent innovation, enhancing energy conservation and emissions reduction, deepening reform and opening up, and ensuring and improving the public well-being. By doing so, we will be able to sustain steady and rapid economic growth, keep the overall level of prices steady, and maintain social harmony and stability. Under new circumstances, our efforts to balance the relationship between speed, structure and prices will have a major bearing on the overall situation of economic and social development. They will also have a bearing on China’s development both now and in the future, and are essential to the success of our economic initiatives in 2012.

A family-owned rural supermarket in Zhongmou County, Henan Province. More than 6 years ago, Henan Province launched a scheme to establish markets throughout the province’s villages and townships. This scheme has since led to notable results, with a total of 50,374 rural shops having been opened in 90% of the province’s administrative villages, representing a total investment of 542 million yuan. The establishment of markets in rural areas is an important part of the government’s efforts to establish a modern rural distribution network and provide greater convenience for production, domestic life, and consumption in rural areas. / Photo by Xinhua reporter Wang Song

During the year 2011, the CPC Central Committee and the State Council formulated rational policy decisions by taking stock of the complex and serious economic situations faced both domestically and internationally. Having identified efforts to curb the excessively rapid increase of prices as the primary task of our macro-control policies, we strived to ensure a balance between maintaining steady and rapid economic growth, adjusting the economic structure, and regulating inflation expectations. We adopted a series of effective measures to guide the national economy towards the expectations of our macro-control policies, thereby creating a favorable situation in which the economy grew at a relatively rapid speed, prices became stable, economic efficiency was increased, and public well-being was improved. Our economy grew by 9.2% in the year 2011, while consumer prices grew by 5.4%. At the same time, positive progress was also made in the restructuring of the economy, marking a favorable start to the Twelfth Five-Year Plan period.

In the year 2012, domestic and international economic situations will be even more complex and severe. We will be confronted with numerous difficulties and challenges as we strive to balance the relationship between speed, structure and prices. From an international perspective, the international financial crisis is far from over. On the one hand, the likelihood is that the economic slump will continue for a long period of time, considering that the European sovereign debt crisis is continuing to simmer, rates of unemployment remain high in major Western economies, the momentum of world economic growth is obviously diminishing, and risk factors are increasing in number. Against this backdrop, major international organizations have lowered their forecasts for global economic growth in 2012. Of course, there have been signs of economic recovery in some countries, such as the US, which require our close attention. On the other hand, the soaring prices in some developing countries and emerging economies, coupled with relatively high rates of inflation in some developed countries have presented them with a dilemma in macroeconomic policy-making. Since our domestic market is now closely linked to the international market, China’s development will be affected by the global economic slump, high inflation rates, and the complex and volatile economic situations in developed countries through different channels.

From a domestic perspective, we are facing a slowdown in economic growth that is intertwined with soaring prices as well as prominent structural imbalances in the economy. First, there is the pressure for a slowdown in economic growth. Alongside decreasing external demand, there is an increasing number of factors constraining the increase of domestic demand, which include the increasing difficulty of maintaining rapid growth in personal income levels, the decreasing capacity and willingness of enterprises to invest, and the large number of obstacles hindering the expansion of private investment. Second, there are still many factors contributing to the rise in goods prices. These include production cost increases resulting from price increases in factors of production such as labor, land, energy and resources, imported inflation caused by the high-level price fluctuations of some bulk commodities in the international market, and also the effects of our efforts to deepen the reform of pricing systems for resource products and regulate prominent imbalances in their prices. Third, the problem of imbalanced, uncoordinated and unsustainable development is still serious. Domestic and external demand is irrationally structured; primary, secondary and tertiary industries are imbalanced; and the development between urban and rural areas and between different regions is uneven. At the same time, our economy is still characterized by an extensive growth mode, with high consumption of energy resources and serious environmental pollution. These are all important factors that are restricting China’s development.

In 2012, our efforts to balance the relationship between speed, structure and prices should be focused on sustaining steady and rapid economic growth and maintaining the overall stability of prices. We want economic growth to take place whilst the overall level of prices remains stable and in a way conducive to the optimization of the economic structure whilst overall supply and demand remain balanced. At the same time, we want price levels to remain stable whilst the economy continues to grow rapidly and steadily. However, economic growth and price stability often contradict each other. It is relatively easy to achieve rapid economic growth without price stability, or price stability without rapid economic growth, but difficult to achieve both. It is even more difficult at present due to the high domestic monetary stock combined with excess global liquidity and low market expectations.

We must accelerate our efforts to adjust the economic structure in order to balance the relationship between speed, structure and prices. Structural adjustment is conducive to enhancing the sustainability of development, promoting the transition from policy-stimulated growth to self-propelled growth, thus avoiding major fluctuations in the economy. It is conducive to increasing effective market supply, restricting irrational demands involving high energy consumption and high emissions, and eliminating the constraints on the balance between overall supply and overall demand. And it is also conducive to promoting the transformation of the economic pattern and innovation in the economic model, improving the quality and efficiency of development, and creating a new situation in which economic growth is stimulated in a balanced manner by domestic demand, international demand, and primary, secondary and tertiary industries, and supported by scientific, technological and educational management. The need for China to accelerate the pace of its structural adjustment has been spelt out by the pressure we have come under owing to the long-standing economic, scientific, and technological superiority of developed countries, the reality that other emerging economies are tapping into their potential factors of production, and the scramble for the future high ground in development that has been taking place between countries since the outbreak of the international financial crisis. The current changes in the domestic and international economic situations are compelling us to make structural adjustment. In summary, transformation is a necessity for development, and a form of development in its own right: a self-sustaining, innovation-driven, and structurally-optimal form of development. Acting in accordance with the situation, we must seize the initiative to push forward the transformation of the pattern of development and promote the in-depth restructuring of the economy.

The Central Economic Work Conference has outlined the major objectives for economic development in the year 2012. It has defined specific requirements in regard to transforming the pattern of economic development, adjusting the economic structure, and promoting reform and opening up. In our further efforts to strengthen and improve macro-control in accordance with the decisions and arrangements of the CPC Central Committee, we must correctly determine the focus, intensity, and pace of macro-control, and conduct the necessary pre-adjustments and fine-tuning at the appropriate junctures in line with the development of the situation, in order to balance the relationship between speed, structure and prices. We need to target prominent conflicts and problems in economic operation, actively give play to the guiding role of relevant plans, and strengthen the coordination of policies pertaining to public finance, credit and industrial development. Through these efforts, we will strive to realize our targets in economic development, make new progress in the transformation of the pattern of economic development and the restructuring of the economy, and create favorable conditions for the thorough application of the strategy of boosting domestic demand during the process of reform and opening up.

II. Boosting domestic demand is the strategic basis for economic restructuring

The contemporary world is undergoing great changes and adjustments, with economic transformation and restructuring becoming an international trend. Considering the fact that the Chinese economy has become closely integrated into the world economy, it is important that we constantly enhance the openness of our economy in order to promote modernization against the backdrop of economic globalization, regional economic integration, and trade liberalization. By taking into account both domestic and international situations, we need to accelerate the transformation of our pattern of development and the adjustment of our economic structure while opening wider to the outside world.

The most important way to restructure the economy is to boost domestic demand. Boosting domestic demand is a strategic foothold on which China’s economic and social development will be based. First, boosting domestic demand is the fundamental means of mounting an effective response to the international financial crisis. Over the last two years, by relying on boosting domestic demand as our primary means of response to the international financial crisis, we have been successful in getting the economy back on track. At present, the underlying effects of the international financial crisis are continuing to surface, and we have witnessed a clear slowdown in China’s export growth owing to the European sovereign debt crisis. In addition to this, there are also projections that the year 2012 will continue to witness a slowdown in international trade growth. Under such circumstances, it is even more important that we exert domestic demand as a stimulus of economic growth in order to maintain our steady and rapid economic development. Second, boosting domestic demand is a fundamental requirement of and a primary task for accelerating the transformation of the pattern of economic development. An important aspect of our efforts to adjust the economic structure and transform the growth pattern is to adjust and transform the demand structure. China has become the world’s largest exporter after over 30 years of reform and opening up, and is more reliant on trade than many other countries. However, with the emergence of global trade protectionism, the expansion of exports is being confronted with increasing friction, barriers and obstacles, and international competition is becoming increasingly fierce as a result. International experience tells us that large countries, developed or developing, owe their economic development mainly to domestic demand. Therefore, boosting domestic demand is the only way to place China’s development on permanently solid ground. Third, boosting domestic demand is an essential requirement of maintaining steady and rapid economic development on a long-term basis. China, with its large population and vast territory, is the world’s largest developing country, and is currently witnessing an important period of strategic opportunity. The huge prospective markets, large space for maneuver, and enormous potential domestic demand we enjoy will have a major bearing on the stimulation of economic development on a long-term basis. Therefore, we must commit ourselves to the strategy of boosting domestic demand. On the basis of past experiences and practices, we must work to address practical problems, develop long-term mechanisms to boost domestic demand, and seize the initiative for development.

The greatest potential for boosting domestic demand lies in urbanization. The coordinated development of urban and rural areas gives a major impetus to the growth of domestic demand. The year 2011 witnessed a historic transition of proportions as China’s urban population exceeded 50% for the first time. However, China’s urbanization is still lagging, not only being much lower than levels of urbanization seen in developed countries, but also lower than the world average. According to statistics, rates of urbanization generally reach 80% in developed countries, and have exceeded 60% in certain developing countries whose level of per capita income is similar to that of China. China is undergoing a rapid phase of urbanization which is not only promoting investment, but also stimulating consumption. For this reason, urbanization has a major bearing on boosting domestic demand. A foreign economist once predicted that China’s urbanization and US technology will be the two major engines behind world economic development in the 21st century. In 2010, consumer spending per capita of China’s urban population was 15,900 yuan, 3.6 times more than the 4,455 yuan of the rural population. Accordingly, it is estimated that for every rural resident who becomes an urban resident there will be an increase of over 10,000 yuan in consumer spending per year. Therefore, if China’s urbanization rate increases by one percentage point every year, meaning that 10 million rural residents become urban residents annually, this will create over 100 billion yuan in consumer spending and an even greater demand for investment. At present, there are 240 million rural workers in China, of whom 150 million are migrant workers. This indicates that we still have a large surplus rural labor force, but also points to the huge potential domestic demand that can be unlocked through urbanization. Meanwhile, we are facing another issue in the emergence of an intra-urban dualistic structure, while fundamental changes have yet to occur to the urban-rural dualistic structure. The intra-urban dualistic structure is manifested as disparities in working and living conditions between urban residents and rural migrant workers along with their families, and also as disparities in housing conditions between the residents of old run-down areas and other urban residents. Though these are problems and difficulties that we must confront, they are also where the potential for domestic demand lies. Resolving both of these dualistic structures will be conducive to promoting coordinated development between urban and rural areas, mitigating social conflicts, and unlocking the potential domestic demand brought about by urbanization.

Our efforts to steadily promote urbanization must be carried out on the basis of fully respecting the will of rural residents, truly safeguarding their rights and interests, and strictly protecting farmland. We need to formulate plans for the medium and long-term progression of urbanization, and work out comprehensive policy measures for their implementation. Urban planning and management should be strengthened in accordance with the objective laws of urban development. By taking into account the varying capacities of different cities and towns in line with their scales and categories, we need to guide the population flow and industrial transfer in a scientific manner in order to ensure the scientific layout, rational division of labor, and intensive development of large, medium and small cities as well as small towns. Such efforts will also allow the functions of these areas to complement one another. We need to promptly formulate and systematically implement policy measures to promote the integration of rural migrant workers into urban areas. These measures should aim to ensure that rural migrant workers are covered by basic urban public services, such as social safety nets, medical care, education and cultural services, and that they gradually enjoy equal access to such services, with a view to gradually resolving the difficulties they experience in regard to employment, housing, medical care, and education for their children. We need to relax the criteria for permanent settlement in medium and small cities, and accommodate rural migrant workers with stable employment and residency as permanent urban residents in a step-by-step manner. We need to formulate standardized investment and financing policies on urban development, further improve the land management system, closely integrate the comprehensive transportation system with the layout of urban areas, and improve urban infrastructure for public transportation, pollution prevention, and the supply of water, electricity, gas and central heating. It should also be noted that the sound development of the real estate market is a major issue pertaining to China’s overall urbanization drive that must be properly addressed. Therefore, in order to steadily advance our urbanization, we must continue our regulation of the real estate market, consolidate the achievements that have already been made in this regard, actively promote the development of low-income housing projects, effectively increase the supply of general commercial housing, and accelerate the establishment of long-term mechanisms to promote the stable and sound development of the real estate market.

The coordinated development of different regions gives another major impetus to the growth of domestic demand. We need to further implement the strategies of overall regional development and development priority zones. In addition to transforming the development pattern of the eastern region, we need to devote more efforts to supporting the large-scale development of the western region, the invigoration of old industrial bases in the northeastern region, and the rise of the central region, with special focus given to old revolutionary base areas, ethnic minority areas, border areas, and poverty-stricken areas. Urbanization has a direct bearing on regional development; and an important feature of underdeveloped regions is lagging urbanization. We need to promote active and steady urbanization in regions with favorable conditions for development and large environmental capacity. By encouraging the rational cluster of factors of production, the centralized distribution of enterprises, and the intensive use of land, we will be able to foster new economic growth poles and strengthen the ability of these areas to develop independently. Instead of imposing uniformity in regional, industrial and land policies, the government should commit itself to providing guidance by category and guaranteeing the growth of some sectors while restricting the expansion of others. For example, we should implement differential policies for the development of competitive industries that display local characteristics in national key development areas of the western region, in order that requirements in regard to energy conservation and environmental protection, quality and safety, and scientific and rational distribution are met.

The service sector is undoubtedly the sector with the greatest potential for boosting domestic demand. Thanks to our long-term efforts, China has grown to become one of the world’s largest manufacturing nations, being among the largest producers of numerous industrial products. There is significant potential for the future development of made-in-China products, which are becoming increasingly competitive in the international market. Relatively speaking, our lagging service industry is the weak link in our economic and social development. According to statistics, the service industry accounts for a relatively low proportion of China’s national economy, only 43.1% of the country’s GDP in 2010. This is not only much lower than the average level of 70% in developed countries, but also lower than the average level of 53% in middle-income countries. It should be recognized that China has strong market demand for both producer services and consumer services, and that the potential for development in both of these sectors is huge. Service industries, the majority of which constitute part of the real economy, are equally capable of creating social wealth and raising our overall national strength. The service sector is also the largest creator of jobs and an important driving force behind scientific and technological innovation. Industrialization requires not only the development of the manufacturing industry, but also the development of the service industry, because the integrated development of manufacturing and services is conducive to improving the quality and competitiveness of industrial development. The Twelfth Five-Year Plan has set forth the target of increasing the share of added-value of service industry in the GDP by four percentage points over the space of five years. We must work hard in order to reach this target.

Accelerating the development of the service industry is the focal point of industrial restructuring. We need to take effective measures to create a favorable environment for the development of the service industry so as to expand its scale and raise its standards. We need to accelerate the development of producer services such as modern logistics, e-commerce and scientific research and design, vigorously develop consumer services such as tourism, fitness, elderly care, and household management, and provide support for the development of small and medium-sized service enterprises. At the same time, we need to actively promote the development of strategically important emerging industries, high-tech industries, and advanced manufacturing industries in order to master core technologies, create new competitive edges, expand our markets, and in particular nurture domestic demand. Doing so will provide a boost for the optimization and upgrading of our industries.

It must be emphasized that we need to promote the modernization of agriculture in step with industrialization and urbanization. Initiatives concerning agriculture, rural areas, and rural residents represent an essential foundation of our efforts to ensure stable growth, control goods prices, boost domestic demand, adjust the economic structure, and promote urbanization. Therefore, we need to commit ourselves to initiatives concerning agriculture, rural areas and rural residents by formulating more effective policies to strengthen agriculture, benefit rural residents, and allow people in rural areas to prosper. We need to accelerate scientific and technological innovation in agriculture and strengthen rural infrastructure in order to promote the development of a new countryside. In addition to strictly protecting farmland and maintaining the area of crop-growing land, we should strive to increase the comprehensive production capacity for major agricultural produce in order to guarantee food security, thereby promoting the steady development of agriculture, the constant increase in rural incomes, and the overall development of rural areas.

Consumer demand is the ultimate form of demand. Regardless of whether we are responding to current challenges or setting our sights on our fundamental long-term objectives for development, the fact remains that we must place a greater emphasis on boosting consumption, and particularly consumer spending, in our efforts to boost domestic demand. China’s economic growth has long been stimulated by investment, with investment being high and consumption being low. According to statistics, China’s ratio of consumer spending to GDP was 47.4% in 2010, which was not only far below the 87.7% of the US, 80.7% of the European Union, and 78.6% of Japan, but also significantly lower than the average level of around 67% for middle-income countries. The huge potential for consumption in China has yet to be fully tapped. While we have ample levers to increase investment, we have few means to shore up consumption, and this is a situation that must be changed. We need to improve fiscal and credit policies aimed at encouraging rational consumer spending, strive to create a more favorable environment for consumer spending, and nurture new hot spots in this regard, with the emphasis on enhancing the spending power of residents. In order to do this, we need to deepen the reform of the income distribution system, adjust the distribution of national income, and gradually balance the relations of income distribution. Through these efforts, we should strive to synchronize personal income growth with the pace of economic development and synchronize the growth of labor remuneration with the increase in labor productivity. We should also employ various means to raise the income level of low earners and increase the size of the middle-income population. In the primary distribution, we need to encourage people to find jobs and start businesses in addition to rationally increasing labor remuneration. We also need to give full play to the role of secondary distribution in regulating income. Efforts must be made to improve insurance systems, such as pensions, medical care, and unemployment, and to promote universal standards in basic public services with a view to establishing a social safety net and addressing the apprehensions of employees and start-up employers.

While boosting consumption is the foundation of our efforts to maintain steady and rapid economic growth, stabilizing investment is the key. Therefore, we need to give full play to the role of investment in directly stimulating the economy. Our experiences in responding to the international financial crisis have shown that investment in the right places is able to take rapid effect across numerous sectors, thereby playing a significant role in stimulating economic growth. The focus of investment from the central budget in 2012 needs to be placed on ensuring the availability of funds for projects under construction and ongoing projects, so as to prevent projects from being abandoned before completion and allow major projects determined by the Twelfth Five-Year Plan to be carried out in an active and orderly manner. In addition to maintaining the rational scale of investment, we need to shift the focus of our efforts towards optimizing the investment structure and improving the quality and efficiency of investment. We need to link investment to consumption, so as to achieve virtuous interaction between the two. We need to give full play to the guiding role of government investment by continuing to tilt investment towards initiatives concerning agriculture, rural areas and rural residents, water conservation projects, underdeveloped areas, social programs, scientific and technological innovations, energy conservation and emissions reduction, and public infrastructure such as railways and highways, in order to unlock potential domestic demand and expand the scope of development.

Our efforts to boost domestic demand and adjust the economic structure require overall planning over domestic development and opening up to the outside world. Against the backdrop of weak external demand, we need to maintain the continuity and basic stability of our foreign trade policies to sustain the steady growth of exports, promote the upgrading of the export structure, and strive to expand into new markets. At the same time, by continuing to regard import expansion as a strategic measure, we need to actively expand imports, and especially the import of advanced technological equipment, key components, important energy resources and raw materials, with a view to enhancing the overall level of our economic development. We need to manage the allocation of resources and factors of production on a global scale, balance the strategies of “bringing in” and “going global,” expand overseas investment cooperation, and use this as a means of promoting overseas cooperation concerning trade, technology, and energy resources whilst actively preventing relevant risks.

III. The purpose and objective of development is to ensure and improve public well-being

Public well-being is closely linked to domestic demand, development, and fairness. Ensuring and improving public well-being will serve to stimulate consumption and increase investment. Therefore, these are important measures and effective approaches for the boosting of domestic demand. At present, China’s GDP per capita has reached US$5,000, leading to constantly increasing demands for public well-being to be ensured and improved. Therefore, the huge potential of domestic demand related to public welfare programs will continue to be unlocked at a faster pace. Increased investment in public welfare programs is in essence a structural adjustment, and an inherent requirement for transforming the pattern of development. In responding to new public expectations and the new requirements of the current situation, we need to place a stronger emphasis on public welfare initiatives in our economic work, and place public welfare projects higher up on the list of development priorities. Efforts must be made to achieve new progress in ensuring and improving public well-being.

In accordance with the principles of guaranteeing basic needs, ensuring broad coverage, and maintaining sustainability, we need to carry out major public welfare projects by making overall plans, emphasizing areas of priority, and taking local conditions into due consideration. These efforts need to be actively carried out in accordance with our capacity and in a planned and step-by-step manner. By doing so, we will be able to gradually expand the coverage of basic public welfare programs, and constantly raise relevant standards in line with our economic development.

The development of low-income housing projects is related to both public well-being and development. The major policy decision of the CPC Central Committee to accelerate the development of low-income housing projects has been made with a view to improving public welfare, stabilizing property prices, boosting domestic demand, and promoting economic development. During the past year, localities and relevant departments across the country have overcome various difficulties to launch the construction of 10 million low-income housing units, marking a good start towards the goal of building 36 million low-income housing units during the Twelfth Five-Year Plan period. Taking into account the overall task as well as local conditions, we are aiming to launch the construction of 7 million low-income housing units and basically complete 5 million units in the year 2012. With a large number of low-income housing projects under construction, consisting of newly-launched projects as well as those that have been carried over, our task will be made more arduous by the need to meet high quality standards and secure large amounts of funding. We will continue to support low-income housing projects through increases in central budget expenditure and budgetary investment. The use of local government bonds also needs to be tilted in favor of low-income housing. Moreover, we should allow eligible local financing platform companies to issue corporate bonds to fund the development of low-income housing projects and their supporting infrastructure. The land supply quota for low-income housing should be listed separately, and directly assigned to local governments by the central government. We need to promptly implement plans for the development of low-income housing projects in 2012 by arranging the necessary funds and land. Our efforts should be aimed at ensuring that construction projects are launched and completed on schedule, that quality standards are met, and that the distribution of housing units is fair, open and impartial.

The renovation of run-down areas is an important aspect of low-income housing projects. Residents of run-down areas are mostly low earners with financial difficulties who live under very poor conditions. In recent years, various localities and relevant organizations have made significant progress in the renovation of run-down areas. However, as our initiatives in this regard have progressed, we have found that the number of areas that need to be renovated is greater than originally estimated. In 2012, we should continue to regard the renovation of run-down areas as a major task in the development of low-income housing projects. We need to strengthen communication and coordination, improve policies pertaining to the renovation of run-down areas, and make overall arrangements in an effort to steadily advance our initiatives in this regard.

The reform of health care systems is a challenge that many countries face. China’s new round of health care reforms is both a major reform measure and a major project for public well-being and development. Since our new round of reforms was launched three years ago, we have made steady progress in our five priority tasks. Basic medical insurance now covers 95% of China’s urban and rural residents, and the selling price of basic drugs has been significantly lowered, marking important progress and outstanding achievements in the current stage of our reforms. The year 2012 marks the launch of new tasks to deepen reform, and is crucial to our efforts in this regard. As reform deepens, difficult issues and institutional conflicts will emerge in quick succession, and the difficulty of our tasks is set to increase. In the next step, we need to learn from the experiences and methods of our prior reforms, promptly formulate plans to deepen reform during the Twelfth Five-Year Plan period, and accelerate our various priority initiatives in accordance with the principle of guaranteeing basic needs, strengthening the community-level institutions, and establishing mechanisms. We need to shift the focus of basic medical insurance from expanding coverage to improving quality. Whilst continuing to increase the coverage rate, we need to further raise the standards of government subsidies and reimbursement rates for medical expenses, promote the reform of payment methods, and improve the medical assistance system and supplemental medical insurance system for urban and rural areas. We need to consolidate and improve the national basic drug system, improve the basic drug pricing mechanism, and establish new operation mechanisms for community health clinics. Moreover, we need to promote the overall reform of public hospitals, put emphasis on launching trials for the comprehensive reform of county level hospitals, and carry out measures in large hospitals to benefit people and afford them with convenience. We also need to optimize diagnosis and treatment procedures, and make innovations in management institutions and mechanisms. To do this, we must probe into a new development pattern for public hospitals that is characterized by the separation of government administration from hospital operation, the separation of regulation from operation, the separation of medical services from pharmaceutical services, and the separation of commercial and non-profit medical institutions. At the same time, we need to promote the diversity of medical institutions to cater to diverse demands for medical care services.

While carrying out major public welfare projects, we need to comprehensively promote action plans to improve public well-being in the fields of employment, social security, education, and culture in accordance with the requirements and arrangements of the Twelfth Five-Year Plan. Committing ourselves to the principles of putting people first, governing for the people, and giving priority to serving the people, we must work to promote universal standards in basic public services by increasing government expenditure, improving policy measures and making innovations in institutions and mechanisms, so that all people may benefit from the achievements of development and reform.

IV. Committing ourselves to reforms in important areas and key aspects

Development is the solution to all of China’s problems. However, the way we develop must be transformed; and the major bottleneck constraining this transformation is institutional and structural obstacles. Without reforms in many areas and aspects, we will be unable to achieve transformation and development. China’s reform has entered a crucial period in which many extremely difficult challenges must be taken on, and this calls for greater determination and courage to push reform forward. We need to better integrate development and reform by making overall plans for reform approaches and measures. We need to strengthen top-level design and the overall coordination of reform, respect the innovation of local communities and the general public, formulate reform approaches and policies, and strive to make new breakthroughs in deepening reform and opening up.

First, price reform needs to be deepened. In a market economy, prices determine the flow of resource allocation, serving as a powerful lever to regulate market behavior. Important progress has been made in China’s price reforms, with the prices of most commodities and services now being determined by the market. However, the problem of irrational pricing is still prominent in regard to energy resources, public services, and environmental protection fees. This calls for greater efforts to deepen reform. China faces a shortage of energy resources, but despite this, our consumption of resources remains high and even wasteful. In 2010, China’s coal output reached 3.24 billion tons, accounting for 48% of the world output; crude steel output reached 637 million tons, accounting for 45% of the world output. China has become the largest energy consumer in the world, with energy consumption per unit of GDP being higher than the world average. This extensive mode of development is unsustainable. In order to resolve difficult issues concerning resources and the environment, we need to step up efforts to eliminate backward production capacity, constrain the rapid growth of energy-intensive industries with high emissions, and rationally control total energy consumption. The fundamental means of achieving this is to rely on institutional and structural reforms. We need to deepen the price reform of resource products. This involves balancing the prices of resource products such as coal, electricity, oil, gas, water, and minerals, so that their prices can better reflect resource scarcity, supply and demand conditions in the market, and the cost of environmental damage. For example, our trials for the tiered pricing of household electricity represent the right direction for the price reform of resource products. This is because tiered pricing gives consideration to both efficacy and fairness, and is able to promote energy conservation and environmental protection. At the same time, we also need to promptly work out plans for the tiered pricing of water and natural gas. We need to rationally control prices for basic domestic consumption, and allow the market to regulate prices for non-essential consumption. We need to continue to improve mechanisms to tie the prices of coal and electricity. Through these reform initiatives, we will be able to ensure the steady operation of the economy while promoting energy conservation, emissions reduction, and structural adjustment. It should be noted that when carrying out price reform, we should avoid overly high estimates of economic growth, which may result in overly tight economic relations, in order to leave room for reform.

Second, the reform of the taxation and financial systems needs to be deepened. We need to better integrate the reform of the taxation system with our efforts to stabilize economic growth, adjust the economic structure, and benefit the people. This should lead to the establishment of a taxation system that is conducive to the transformation of the pattern of development. At the same time, we should take the following measures to improve the financial system, strengthen financial regulation, prevent financial risks, and guarantee financial stability and security. First, in accordance with the principle of making the financial resources of governments more proportionate to their duties and responsibilities, we need to further balance budgetary distribution between governments at all levels, increase the scale and proportion of general transfer payments, and provide a stronger financial guarantee for the provision of public services by county governments. Second, we need to improve the way that budgets are formulated and the way that their implementation is managed to make budgets more comprehensive and transparent. Third, we need to rationally adjust the scope and rate of consumption taxes and work out means of imposing consumption tax on certain energy-intensive products whose production causes high emissions. We should also gradually expand trials for the reform of real estate tax, and formulate plans for the reform of taxes and fees concerning environmental protection. Fourth, we need to continue to deepen the reform of large-scale state-controlled financial institutions, actively nurture small and medium-sized financial institutions, and promote the sound development of the capital market and especially the bond market. We need to deepen reforms to make interest rates subject to market forces and improve the RMB exchange rate regime, promote RMB capital account convertibility in a step-by-step manner, and expand the use of RMB in cross-border trade.

Third, the reform of the investment system needs to be deepened. Enterprises play the principal role in the market economy, and in efforts to boost domestic demand and adjust the structure of the economy. We need to balance the relationship between the government and enterprises by giving full play to the independent operation and initiative of enterprises. Restrictions on market access must be further relaxed. In a conscientious effort to implement the State Council’s New 36 Articles for encouraging and guiding private investment, we must act promptly to formulate concrete policies on dismantling monopolies, promoting equal market access, and encouraging competition, so as to encourage private investment in sectors such as rail transport, urban development, banking, energy, and social programs. We also need to scale back the scope of administrative reviews for proposed investments. Government review and approval should only be required for government funded projects and items that have a direct bearing on national economic security, the overall situation, resources, and the environment. Through efforts to simplify approvals, standardize approval procedures, and improve relevant services and supervision, we will work to create a favorable environment for economic development.

V. Promoting coordinated economic and social development while seeking steady progress

The year 2012 is an extremely important year for China’s development. In line with the keynote of making progress amidst stability, not only must we sustain steady and rapid economic growth and maintain the overall stability of prices, we must also make new progress in transforming development patterns, promoting reform, and benefiting the people. In order to achieve this, we must integrate our efforts to accelerate the transformation of the pattern of economic development into all aspects of economic and social development and place a greater emphasis on improving social development whilst working to promote economic development. Doing so will allow us to promote coordinated economic and social development.

Strengthening social development is conducive to boosting domestic demand, optimizing development, and raising the living standards of the people. We need to rationally define the scope of basic and non-basic needs. The public service system we are seeking to develop can roughly be divided into two parts: basic and non-basic. Under China’s current conditions, basic public services mainly include public employment services, basic pension insurance, compulsory education, basic medical and health care, low-income housing, public cultural services, basic environmental quality, and public security. These services aim to ensure that the basic needs of all citizens, especially low earners, are met. As the most fundamental and important form of public services, basic public services are characterized by their public welfare nature. As such, the government is obligated to play the main role in the provision of such services. Non-basic public services refer to services that aim to satisfy the diverse needs of citizens. Speaking proportionately, the needs of most people should be catered to by the market. In addition, this can be complemented by the participation of social forces, with efforts to support and guide mutual aid. This will not only provide for the growth of non-government investment, accelerate the development of social services by tapping market forces, and promote social harmony, but will also free up the government’s financial resources and allow it to better carry out its obligation to ensure basic needs. It should be emphasized that the dividing line between basic and non-basic needs is not fixed. We should rationally expand the scope and adjust the standards of basic public services in line with the increasing levels of economic development and public finance guarantees.

In order to strengthen social development, we need to balance the relationship between public programs and industries for the provision of social services. Social services consist of government-provided public service programs, such as compulsory education, public health care, public cultural services, and public sports, as well as market-oriented service industries, such as training services, non-basic medical care, cultural industries, and sports and fitness services. Both sectors are characterized by a strong capacity to absorb labor, significant potential for social and market demands, low energy consumption, and little pollution, and therefore enjoy broad prospects for development. In order to promote coordinated economic and social development, not only must we maintain the public welfare nature of social programs, but we must also subject industries engaged in the provision of social services to market forces and promote their development as industries in an active effort to foster new growth areas. For example, the medical services industry is a large-scale industry which can and should become a major aspect of China’s service industries. According to World Bank statistics, health care spending can account for 10% or more of the GDP in some developed countries. In the US, this total is as high as 17.6%; in some developing countries, it can reach 6% to 8%; but in China, it is less than 5%. When combined with services such as elderly care, wellness services, disability assistance, and household management, medical services will have even larger potential for development.

In order to strengthen social development, we need to focus on resolving issues affecting the immediate interests of the people. For example, the issue of goods prices has a direct bearing on the daily life of all households. We need to approach the issue of price reform whilst maintaining the overall stability of prices. When formulating price policies and relevant reform plans, we need to take various factors into account, fully consider the ability of the public to cope, and strive to act at the appropriate junctures and with the right degree of intensity, so as to keep the impact of changes within rational levels and ensure that public well-being is safeguarded. Another example is the supply of coal, electricity, oil, gas and transport. These supplies are closely tied to industrial and agricultural production as well as people’s everyday lives, and there is often a tight balance between their supply and demand. In accordance with the principle of ensuring public well-being and promoting social harmony, we need to strengthen coordination between different departments and regions, optimize organization and regulation, and adopt measures such as increasing production, carrying out management on the demand side, and promoting the development of transport thoroughfare, in order to improve our ability to supply coal, electricity, oil, gas and transport. At the same time, we need to improve various emergency response plans and strengthen our ability to respond to emergency situations. By effectively guaranteeing national energy security and ensuring that people’s everyday lives are free from disruption, we will be able to tap into our potential domestic demand, and in particular consumer spending, on a constant basis.

Successfully carrying out our development and reform initiatives in the year 2012 will be an arduous task and a great responsibility. Let us rally more closely around the CPC Central Committee with Hu Jintao as General Secretary; hold high the great banner of socialism with Chinese characteristics; take Deng Xiaoping Theory and the important thought of Three Represents as our guide; thoroughly apply the Scientific Outlook on Development; remain spirited and energetic; work diligently through our unremitting efforts; make new and greater contributions to promoting reform and opening up as well as economic and social development; and greet the Eighteenth CPC National Congress with outstanding achievements.


(Originally appeared in Qiushi Journal, Chinese edition, No.4, 2012)

Author: Member of the Standing Committee of the Political Bureau of the CPC Central Committee and Vice-Premier of the State Council

This article is compiled from a speech delivered by the author at the Seminar on National Development and Reform Work held on December 15, 2011.

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