2011-03-04 14:31

MANILA - The 12th Five-Year Plan to be approved by China's National People's Congress session starting Saturday is a watershed for what has recently emerged as the world 's second largest economy.

It's widely expected that the plan is likely to contain measures to boost domestic consumption - a sign that China's leadership is gradually steering its economy away from export and investment-led growth.

"The 12th Five-Year Plan is probably China's most important ( economic) plan in terms of its depth, complexity and the challenges (it seeks to address)," said Yolanda Fernandez Lommen, head of the China economics unit at the Manila-based Asian Development Bank.

Lommen said the Chinese government aims to restructure and rebalance the economy and reduce inequality. It's also important, she notes, to promote equal income distribution that the recent gains from the economic boom will benefit the majority of China's population.

Lommen is especially keen on the fiscal policy that will be in place from 2011 to 2015.

"This is very important as this is the way for the Chinese government to secure enough resources to fund the reform that must be implemented (under the Five-Year Plan)," she said.

"It's not going to be cheap to provide universal health insurance and pension to 1.3 billion people," she stressed. But Lommen is confident that given China's solid public finance, it has enough space to be more expansionary and provide more resources to social security.

The strengthening of social safety nets is crucial in raising consumption, which now accounts for only a third of China's GDP. This is among the lowest in the world a fact that most economists attribute to fear-based precautionary savings.

"If you don't have pension, health insurance or (access to free) public education, you need to save a lot," Lommen said.  Social safety nets will free up some of these savings, expanding consumers' disposable income and raising consumption.

There are strong signs that China's government is going in that direction. The State Council, China's Cabinet, on Wednesday approved in principle a proposal to raise the personal income tax threshold. Premier Wen Jiabao also announced that the government plans to build 36 million "affordable homes" by 2015. The details will be finalized during the National People's Congress, but proposals are expected to benefit low income households and boost their purchasing power.

Aside from its pro-consumption policy, the 12th Five-Year Plan also includes measures that adapts to the challenges of the 21st century climate change and overpopulation. It also focuses on the developing of strategic emerging industries such as alternative energy, new materials and information technology.

Lommen noted that this won't be achieved overnight. The development of new industries, for instance, will entail huge investment on research and development and education.