U.S.-China Economic and Security Review Commission, "Hearing on China Ahead of the 13th Five-Year Plan: Competitiveness and Market Reform," April 22, 2015

Wednesday, April 22, 2015
216 Hart Senate Office Building
Washington, DC

Hearing Co-Chairs: Commissioners Robin Cleveland and Michael Wessel

OPENING STATEMENT OF COMMISSIONER MICHAEL R. WESSEL

Good morning. We will get started. Thanks, everyone, for being here at the fifth hearing of the U.S.-China Economic and Security Review Commission's 2015 Annual Report cycle. I want to thank our witnesses for being here today and for the time that they have put into their excellent written testimony. Before we begin, let me take a moment to thank the Senate Minority Leader Harry Reid and his staff for securing this room for us today.

Today's hearing raises questions regarding China's market reform and the long-term implications for U.S. competitiveness. China's Five-Year Plans are an important component in China's broader industrial policy by outlining the Chinese government's priorities and signaling to central and local officials and industries the areas for future government support. The 12th Five-Year Plan focused on moving up the value-added chain, especially for its seven designated strategic emerging industries, and promoting indigenous innovation. At the National People's Congress last month, Premier Li Keqiang announced that "Made in China 2025" and "Internet Plus" initiatives, which are aimed at increasing market share in other areas where the United States currently has an advantage.

As a result of strong government support to build capacity and to drive market demand in the clean energy sector, eight of the world's top-15 wind turbine makers in 2013 and six out of the world's top ten solar photovoltaic manufacturers are Chinese. Furthermore, continued support for heavy industry sectors such as steel has created cascading oversupply--directly impacting the employment and profitability of steel firms here in the United States.

Today's hearing also comes amid China's push for indigenous innovation. While encouraging innovation is important for sustaining long-term economic growth, China's domestic procurement requirements, forced technology transfers, and secrecy in standard setting are effectively shutting U.S. firms out of China's lucrative market. This past weekend, IBM handed over a partial blueprint of its higher-end servers and software to ensure market access. While beneficial for IBM in the short-run, this transfer may lower the capacity gap between U.S. and Chinese firms, impacting the long-term competitiveness of the United States.

China has also made great strides in aerospace and in the auto sector, two important drivers of our economy. The five-year plans, and supporting policies, have helped promote their development and soon, I expect, international competitiveness in these sectors.

Today, we look forward to exploring these issues and hope to find creative ways that the United States can work with China to create a level playing field and ensure sustained U.S. competitiveness.

I now will cede the floor to my co-chair and colleague, Commissioner Cleveland, for her opening remarks.

OPENING STATEMENT OF COMMISSIONER ROBIN CLEVELAND

Thank you, Mike, and thank you for our panelists for appearing. I am really looking forward to hearing from you.

Today's hearing comes at an opportune time. This year the Chinese government is simultaneously finishing its implementation of the 12th Five-Year Plan and drafting the next one or, as our witnesses know, not a plan but a process. The reforms and targets China sets under this new plan will shape global competitiveness and economic growth. Understanding the plan and the opportunities and challenges they create for the United States is critically important.

Today's hearing seeks to address three important questions: how will the effectiveness of the current Five-Year Plan and interim economic goals influence the Chinese government's approach to the 13th Five-Year Plan and process; how are China's efforts to move up the value-added chain and promote innovation impacting the U.S.-China trade and U.S. competitiveness; and, finally, what are the opportunities and challenges for U.S. companies to compete fairly in China's expanding consumer and service market?

We'll begin today's proceedings by assessing the 12th Five-Year Plan and how it's meeting its key objectives. Since the 11th Five-Year Plan, China has sought to shift economic growth away from fixed investment and export-led growth toward a more domestic consumption and higher value-added manufacturing model. In 2014, the service sector rose--and I think this is marginally debated within the first panel--to 48.2 percent of GDP, exceeding the share of manufacturing and construction,
representing a fairly positive shift. In addition, the Chinese government has dedicated significant resources over the last five years to boost consumption. However, the question for all of us is will the current slowdown, economic slowdown in China's growth, affect the Party leadership's maneuverability and opportunity to further rebalance the economy?

The final panel today will examine the impact--did I miss a panel? The final panel today will examine the impact of China's Five-Year Plans on urbanization, welfare, labor, and financial reform, and consider the opportunities and challenges a more consumption-oriented economy could create for U.S. companies. An emerging middle class--that elusive middle class--is creating a new consumer market for better quality products and services with urban consumption expected to grow from 1.7 trillion to 4.5 trillion in 2022. Furthermore, the Chinese government is planning to make major investments in transportation, public utilities and health care. The scale and number of these projects creates opportunities for both domestic and foreign companies. However, an opaque regulatory environment and market access barriers are tilting the playing field--potentially--against U.S. companies.

As a reminder, the testimonies and transcripts from today's hearings will be posted on our Web site, and you'll find a number of other resources, including really good staff papers, on that site.

Panel I: Assessment of the 12th Five Year Plan
Dr. Stephen Roach, Senior Fellow, Jackson Institute of Global Affairs, Senior Lecturer, School of Management, Yale University
Mr. Nicholas Consonery, Director of Asia, Eurasia Group
Mr. Oliver K. Melton, Senior Economic Analyst, U.S. Department of State

Panel II: The Impact of China’s Five-Year Plans on Strategic Industries
Dr. Xiaolan Fu, Professor of Technology and International Development, Director, Technology & Management for Development Centre, University of Oxford
Dr. Ernest Preeg, Senior Advisor for Trade and Finance, Manufacturers Alliance for Productivity and Innovation
Dr. Gary H. Jefferson, Carl Marks Professor of International Trade and Finance, Brandeis University

Panel III: The Broader Implications of China’s Five-Year Plans
Dr. Dali Yang, Professor of Political Science, Faculty Director, Center in Beijing,  University of Chicago
Dr. Eswar S. Prasad, Tolani Senior Professor of Trade Policy, Cornell University, New Century Chair in International Economics, Brookings Institution
Mr. David Frey, Partner, Markets Strategy, National Head of U.S.-China Strategic Corridor, KPMG China