Li Shantong, HouYongzhi, Liu Yunzhong& He Jianwu, Department of Development Strategy and Regional Economy of DRC Research Report No. 034, 2005

After two decades or so of rapid economic development since the beginning of reform and opening up, the Chinese economy has entered a new and dynamic period of development. During this period, China will have important strategic opportunities for its economic development and all the economic and social tensions will be prominent. If China can seize these opportunities, overcome the difficulties in advance, solve the problems arising from development and maintain rapid economic growth, its economic strength and its overall national strength will move to a new high and the living standard of its people will rise to a new level.

The development of the Chinese economy in the future will face a changing internal and external environment as well as various opportunities and challenges. Due to the interaction of these uncertain factors, the economic development will also have great uncertainties. Selecting different development strategies will lead to different development results. This paper used scenario analysis to simulate the prospect of China’s economic development during the 11thFive-Year Plan and an even longer time.

First, we tried to give a base growth scenario in light of the unique features of the development and structure of the Chinese economy. Based on the past and present development features, the base growth scenario analyzes development trends, from which possible scenarios will be derived. In addition to the base growth scenario, we designed two additional scenarios. One is a coordinated development scenario, in which the economy, society, resources and the environment will develop in a coordinated manner, in keeping with the requirements of the scientific concept of development and through industrial restructuring and efficiency improvement. The other is a "risk" scenario, which will give more consideration to the possible risks that might be encountered in the future.

The model used by this research is the DRCCGE2004 version of the dynamic recursion China CGE model developed by the Development Research Center of the State Council. The time span for the simulation ranges from 2005 to 2020.

I. Scenario Design

First of all, this paper hypothesized some external factors and simulated various scenarios of China’s economic growth and structural changes from 2000 to 2020 in light of the unique features of the growth and structure of the Chinese economy and development trends (see Table 1). In simulating various scenarios, we also hypothesized the growth trends of population and labor, the process of urbanization, the growth rate of government consumption and the total factor productivity (TFP)[1]What we need to emphasize is that we also designed the preference of technological advance, which means that the advance of productivity is not neutral to different sectors. In the simulation, the share parameters for the production function (including the coefficient of intermediary inputs) are all updated so as to reflect the preference of technological changes in inputs.

The base scenario forecasts that the Chinese economy will continue its past development trend, the labor force will continue to move fast, human resources accumulation and technological advance will likely bring about an incremental effect of scale, system reforms will deepen further, the reform of the financial system, the trade system, the investment system and the state-owned enterprises will promote a more rational and effective allocation of the factors between different sectors and different regions. The interaction of all these factors will help maintain the TFP growth during the 2005-2020 period at the level of the past 25 years. That means the average annual growth rate will be between 2.0 percent and 2.5 percent. Urbanization and industrialization will move forward rapidly. Urbanization will continue to move forward rapidly at an average annual pace of 1.1 percentage points, expected to reach about 49 percent by the end of the 11thFive-Year Plan and about 60 percent by 2020. Technological advance in the future will continue to have a certain preference.[2] The savings behavior of the Chinese people will unlikely change dramatically during the 11thFive-Year Plan but the savings rate will drop slightly after 2010. The WTO-related tariff concessions and other commitments will be fulfilled and the impact arising from WTO accession will continue.

The Fourth Plenary Session of the 16th Party Central Committee put forward the scientific concept of human-oriented, all-round, coordinated and sustainable development so as to better push forward economic and social development. This will be a basic guideline for China’s development in the future. In keeping with this concept of development, we designed a coordinated development scenario. This scenario is based on a rapid and smooth progress in the reform of various systems, the stronger roles of the market in resource allocation, the vigorous advance in restructuring, and the progress in changing the mode of economic growth. On the basis of the base scenario, we further hypothesized that the industrial structure would be further upgraded, and the reform of the systems and rules would promote a rapid development of the service industry (especially the productive service industry) and eventually help optimize and upgrade the whole industrial structure. In the meantime, further market-oriented reforms would straighten out the prices of various resources (including energy), rationalize the allocation of resources and increase the efficiency of resource and energy utilization of enterprises. Therefore, we hypothesized that the preference of technological advance and the changes in the rate of intermediary inputs would further favor the coordinated development of all industries on the basis of the base scenario. In particular, the intermediary use of the service industry and the high-tech industries by various sectors would be faster and push up the added value of the high-tech industries. On the basis of the base scenario, the TFP growth rate of the service industry would be one percentage point higher each year during the 2005-2010 period and 0.5 percentage points higher each year during the 2010-2020 period. On the basis of the base scenario, the efficiency of energy utilization would be 0.2-0.5 percentage points higher and the movement of agricultural labor to non-farm industries would be fast.

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*This report is one of a series of research papers on "Guiding Principles for the 11th Five-Year Plan and the Long-Term Goals by 2020".

[1]TFP is mainly set through model dynamics on the basis of the TFP growth rate over the past two decades or so.

[2]The preference of technological advance and the changes in the rate of intermediary inputs are mainly set with reference to the change trends reflected in China’s input and output sheet 1987-2000 and the change trends of the relevant parameters of the United States.