China mulls $1.5 trln boost for strategic industries - sources

BEIJING Thu Dec 2, 2010 6:42pm IST

Yuan banknotes are seen in this illustrative photograph taken in Beijing July 26, 2010. REUTERS/Jason Lee/Files

Yuan banknotes are seen in this illustrative photograph taken in Beijing July 26, 2010.

Credit: Reuters/Jason Lee/Files

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BEIJING (Reuters) - China is considering investments of up to $1.5 trillion over five years in seven strategic industries, sources said, a plan aimed at accelerating the country's transition from the world's supplier of cheap goods to a leading purveyor of high-value technologies.

Analysts expressed scepticism at the sheer amount of money -- it equates to about 5 percent of China's gross domestic product on an annual basis -- but said that the eye-popping headline figure was an indication of the government's determination to catalyse a structural shift in the economy.

The targeted sectors include alternative energy, biotechnology, new-generation information technology, high-end equipment manufacturing, advanced materials, alternative-fuel cars and energy-saving and environmentally friendly technologies.

The central government itself would most likely not deliver the bulk of the money, but would seek to spur spending by corporations, investment by local governments and lending by banks.

The Central Economic Work Conference, the key annual meeting at which top leaders chart out economic policies for next year, is likely to endorse the plan for the seven new strategic industries when it convenes later this month.

"The State Council is considering a plan to invest up to 2 trillion yuan ($300 billion) each year in the seven new strategic industries over the next five years," a source with ties to the leadership and direct knowledge of the proposal told Reuters.

The source declined to be named because of the sensitivity of the information.

Beijing has said before that it wants to promote the sectors, a policy that it hopes will make the country less dependent on low-end, dirty manufacturing. The value-added output of the seven strategic industries together account for about 2 percent of GDP now. The government has said it wants them to generate 8 percent of GDP in 2015 and 15 percent by 2020.

By pushing these sectors, China would be making a big bet that technology can help bridge the gap between limited supplies of commodities and the rapidly growing demand that has propelled the country to become the world's second-biggest economy.

The ruling Communist Party's 2011-2015 five-year plan calls for "cultivating and developing" the sectors.

But to date, the government has given no figure for how much money it will spend as part of the five-year plan for reshaping the economy.

The proposed investment in the sectors would rival the government's two-year 4 trillion yuan stimulus package which came to a close in November.

"It's one of these figures that is so big that even if it is exaggerated the actual figure is probably still big," said Ben Simpfendorfer, an economist with Royal Bank of Scotland in Hong Kong.


Chinese officials sometimes declare vast investment ambitions as a way of rallying support for spending initiatives, even if the numbers ultimately fail to live up to their original billing.

"Focusing on the seven new strategic industries will increase China's competitiveness and push the economy further up the value chain," said Zhao Changhui, chief economist of the Export-Import Bank of China.

"It will provide direction for transforming China's economy," Zhao said. "It's the next stage of globalisation."

The government is also expected to give preferential treatment to investors in terms of tax and land acquisition.

The Chinese-language China (Huaxia) Times reported that the income tax rate for investors in the seven sectors would be halved to 7.5 percent.

Official media have also reported that China will invest 5 trillion yuan in renewable energy projects over the next decade. The money spent on the seven industries in the up to 10 trillion yuan initiative could, to a certain extent, overlap with that.

The plans could also encounter opposition from some quarters of government.

The National Development and Reform Commission (NDRC), a powerful planning agency, has said that the wind-power industry is already suffering from over-capacity, raising doubts about the need for large-scale investment in alternative energy.

The NDRC declined to comment on Thursday.

Xu Jian, an economist with China International Capital Corp in Beijing, questioned whether the seven targeted sectors could handle such an influx of cash.

"They are still in their initial stage of development. They are unlike conventional manufacturing industries, which are big in scale. So in terms of that, this investment may be too big," he said.

The plan needs the approval of the National People's Congress, or parliament, which will hold its annual session in March 2011.

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