Zhang Xiaoji& Long Guoqiang, Project Team on "Basic Thinking of the 11th Five-Year Plan and Long-term Goals of 2020" of DRC Research Report No.037, 2005

In the next 5-15 years, China’s opening up to the outside world will enter a new period of development. China’s peaceful development will have a major influence on the existing world order and will face a more complex external environment. Therefore, with increasingly higher dependence on external markets and resources, how to handle its relations with the international community and create a mature external environment will be of vital importance to China’s development in the future.

I. The External Environment for China’s Development during the 11th Fiver-Year Plan

1. The external conditions favorable for China’s development

(1) The world economy will be in a period of cyclic upswing during the 11th Five-Year Plan

Influenced by the IT revolution that began in the 1980s, the world economy in 2010 will continue to be in a period of cyclic rising (research on the theory of economic cycles indicate that due to the influence of major technological revolutions in different historical periods, the world economy fluctuates roughly in a cycle of 40-60 years, which can be divided into the rising and declining periods). The growth of the world economy during the 11th Five-Year Plan will be higher than that during the 10th Five-Year Plan and largely at the same level (3.6 percent) of the second half of the 1990s.

(2) The new technological revolution will continue to push forward global economic development and industrial restructuring for a considerable time to come

The wave of the global IT revolution in the 1990s spurred a rapid global economic development, from which China also benefited immensely. The IT revolution is still on the upswing and will continue to exert its influence in the next five years. Currently, developed countries are increasing input in biotechnology and other high technologies. By the year 2020, major breakthroughs would possibly be made and become the leading force to push forward a new round of world economic growth. The new technological revolution will accelerate the industrial restructuring and outward industrial transfers of developed countries, which will be favorable for China to tap its follow-up advantages and promote its economic structural upgrading and economic development through opening up to the outside world.

(3) Trade liberalization will continue to advance

A more liberal world trade system will in general bring more advantages than disadvantages to China. In 2005 as the trade in textiles and clothes enters the post-quota period, China’s export of textiles and clothes could have a rare opportunity to grow rapidly for 3-5 years. The Doha Round negotiations are expected to wind up in the next 2-3 years, and as a result the distortion of the international market of farm products will be corrected, which will be conducive for China to raise the competitiveness of its farm products and ease the pressure of importing bulk agricultural products. The results of DDA will begin to have influence in the latter part of the 11th Five-Year Plan. It is expected that the growth rate of world trade in the next five years will be 3-4 percentage points higher than that of world economy. In the next 15 years till 2020, world trade can continue to maintain a fairly fast growth thanks to the influence of the new technological revolution and the faster industrial transfer.

The wave of regional economic integration will be more forceful. In the next 5-15 years, Europe and Americas could form a more wide-ranging integrated regional market. At the same time, China’s free trade arrangements with ASEAN and other countries and regions will gradually enter into force and play their roles. The regional institutional arrangements in which China has been actively involved will bring even more trade opportunities and development space.

(4) Cross-border industrial transfer will bring new opportunities

The wave of the new technological revolution will spur developed countries to quicken industrial restructuring, and their traditional manufacturing industry, the capital- and technology-intensive heavy industries and some of the manufacturing sectors of the emergent industries will move to developing countries at a faster pace. As China’s market scale continues to expand, the country is attracting more and more investment from the foreign manufacturing industry and the country continues to enjoy the advantage of high-quality and low-cost R&D personnel, transnational companies are beginning to spread their R&D activities to China and the establishment of R&D centers in China will become a new trend for foreign investment. Meanwhile, cross-border transfer of service industries from developed countries has also become a trend with outsourcing as an important form of cross-border transfer of service industries.

2. The new challenges facing China’s development

(1) The uncertainty of the development of the US economy

The United States claims one-third of the total world economy, and its development prospect will have an important influence on the world economy. Despite the ongoing dynamic recovery, the U.S. economy still faces major structural problems, including the "double deficits" (the current account deficit and the fiscal deficit respectively account for 5.4 percent and 4.9 percent of the GDP), an ageing population, the difficulties related to pension system, and the difficult structural upgrading caused by outward industrial transfers. The fundamental cause of all these is the excessively low rate of savings, at only about 2 percent. The development prospect of the U.S. economy depends to a very large extent on the continuous inflow of foreign capital. If the exchange rate of the U.S. dollar continues to decline, it will affect the confidence in the U.S. dollar and the U.S. economy as well as the inflow of foreign capital. And if capital inflow slows down or turns into a net outflow, the U.S. economy could be in a difficult situation and bring about an inestimable shock to the world. Currently, China has trade deficits with all major neighboring economies and a huge trade surplus with the United States. A big problem with the U.S. economy will undoubtedly affect China accordingly.

(2) The instability of the international financial system

In recent years, the huge "double deficits" of the United States have weakened the U.S. dollar. If this trend continues, it will have a major influence on the international financial system. As far as China is concerned, the negative impact will be in two aspects. First, it will drastically devalue China’s foreign exchange reserves, which will be a huge loss to the country for most of its 600-billion-dollar foreign exchange reserves are assets in U.S. dollars. Second, the Chinese currency Renminbi will face great pressure for appreciation. A mishandling of the range and timing of such an appreciation could produce great shocks to China’s exports, its balance of payments, its industrial restructuring and even its financial security.

(3) Trade protection measures are becoming diversified

Recent years have witnessed economic stagnation, rising unemployment and factor costs, and declining competitiveness of traditional industries in some countries. This has spurred an anti-globalization wave and impeded the new round of global trade liberalization. As a result, trade protectionism reared its head in the form of protecting the environment and the labor rights, and some countries deliberately raised technical barriers and abused the anti-dumping and other trade relief measures. Trade protection measures are becoming diversified. As China has entered a period of frequent trade frictions and as the leading trade partners will not easily recognize China’s status as a market economy, China’s export products will be more prone to be affected by new trade barriers.

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