4.1 Structure and mechanism of 3E model

The Task Force has developed a 3E (Economy-Energy-Environment) model that could forecast and provide early warning for China’s economic growth, energy consumption and environmental pollution, It is a quantitative analysis platform, which combines econometric technique, input-output analysis and extended linear expenditure system..

The 3E model consists of three sub-models: economy, energy and environment.

The economy sub-model consists of the following modules: income, consumption, investment, import and export, employment, final demand formation and total output, which mainly forecasts industrial outputs, value-added by sectors, product sales volume, population ,urbanization level and so on.

Based on the forecast results from the economy sub-model and the estimated energy consumption coefficient, the energy sub-model mainly forecasts volume and structure of energy consumption in each sector. Besides, volume and structural change of resident energy consumption are forecasted.

Also based on the results from the economy sub-model, the environment sub-model mainly forecasts generated volumes of wastewater, water pollutant, air pollution and solid waste. Volumes of reduction and discharge of these wastes are also forecasted. In order to control these wastes, investment should bring into operation which is just the feedback variable into the economy part. Based on this sub-model, we can also simulate the impacts of pollution control investment on economic development. The structure of the 3E mode is as following (see figure 3).

Figure 3 Structure of 3E Model

4.2 Qualitative analysis of macro economic trend during the 11th Five Year

4.2.1 Long-run economic trend in China

Since the reform and opening up, China has been advancing in the rapid path of economic growth. GDP in 2005 increased nearly 12 times than that in 1978and per capita GDP increased nearly9 times, reaching USD 1750 according to current exchange rate. Following the development goals set up in the 16th Representatives Meeting of CPC, GDP in 2020 will be double compared with the GDP in200， , in other words, the annual growth rate of GDP should reach 7.2% on average. Based on our judgement, the average annual growth rate of GDP will exceed 9% during the 11th Five Year. The reasons are as following,

4.2.1.1 During the 11th Five Year, China’s economic growth will remain at high level of the business cycle. From 1978 to 2000, China is one of the fast growth countries in the world, and the average annual growth rate of GDP was over 9%. Since 2000, China’s economy has entered into another round of rapid growth, and major macro-economic indicators have maintained sound performance, which provide a favourable foundation for further rapid and stable economic growth during the 11th Five Year in China.

4.2.1.2 The investment to acceleration upgrade of heavy and chemical industrial structure is the main character in China. . Since the late 1990s, China has entered into a new stage, which is the speeding up phase of industrialization and urbanization. Following the experiences of industrialization in the rest of the world, heavy and chemical industry usually upgrades rapidly at this stage. Therefore, China’s investment will keep increasing at relative high speed, and investment ratio will remain at the level of 35-40% in the next five years.

4.2.1.3 Upgrading of consumption structure becomes an important driving force . With the gradual increase of resident income, China has entered into the age of mass consumption, and demand structure will be substantially changed accordingly. After Chinese citizens reach overall “xiao kang” standard of living, targets of consumption will be turned from products worth of thousands RMB to those worth of ten thousand or more expensive. Updated household appliance, family cars and housing will become the new consumption hotspots for urban residents.

4.2.1.4 Rapid urbanization promotes the stable and rapid increase of domestic demand. International experiences suggest that the progress of urbanization may be divided into three phases: start-up, speed-up and maturity. China’s urbanization ratio was promoted from 29.04% in 1995 to 42.99% in 2005, which is in the speed-up stage and will go on in the following years. Development of housing and infrastructure will still stimulate investment, and will further encourage the growth of the entire economy. In the 11th Five-Year Plan, the strategy of constructing a new socialist countryside is proposed, providing another investment hotspots.

4.2.1.5 Stable international situation is favourable to China’s economy, and foreign trade will remain one of the driving forces of domestic economic growth. In the next 5-15 years, peace, development and cooperation will continue to be the main theme of the world, and this will offer a great opportunity for world economic development. Further economic globalization, faster international industrial transfer and better functioning of science and technologies will be the irreversible trend of future global economy. Under this circumstance, China’s cheap labour is still dominated the competition, and foreign trade will play an important role in stimulating China’s economy.

Box 3 GDP growth rates planned by provinces/cities and weighted national rate

Box 3   GDP growth rates planned by provinces/cities and weighted national rate
Province/city	Planned GDP growth rates between 2006 and 2010 （%）	Weight in national economy in 2005 （%）	Contribution to national economy	Province/ City	Planned GDP growth rates between 2006 and 2010 （%）	Weight in national economy in 2005（%）	Contribution to national economy
Beijing	9%	3.47%	0.31	Guangdong	9%	11.04%	0.99
Tianjin	12%	1.86%	0.22	Guangxi	10%	2.07%	0.21
Hebei	11%	5.15%	0.57	Hainan	9%	0.45%	0.04
Shanxi	10%	2.10%	0.21	Chongqing	10%	1.56%	0.16
Inner Mongolia	13%	1.94%	0.25	Sichuan	9%	3.76%	0.34
Liaoning	11%	4.07%	0.45	Guizhou	10%	0.99%	0.10
Jilin	9%	1.84%	0.17	Yunnan	9%	1.77%	0.16
Heilongjiang	10%	2.80%	0.28	Tibet	12%	0.13%	0.02
Shanghai	9%	4.65%	0.42	Shannxi	11%	1.87%	0.21
Jiangsu	10%	9.30%	0.93	Gansu	10%	0.98%	0.1
Zhejiang	9%	6.80%	0.61	Qinghai	10%	0.28%	0.03
Anhui	10%	2.73%	0.27	Ningxia	10%	0.30%	0.03
Fujian	10.90%	3.34%	0.36	Xinjiang	9%	1.34%	0.12
Jiangxi	11%	2.06%	0.23	Hubei	10%	3.30%	0.33
Shandong	10%	9.40%	0.94	Hunan	10%	3.29%	0.33
Henan	11%	5.36%	0.59
National GDP (calculation based on regions’ GDPs planned and weights of the GDPs in national economy in 2005)				9.96%

4.2.1.6 Local governments will face heavier pressures of economic development. Various social conflicts will put greater pressure on local governments to develop economy. As defined in each province’s /city’s 11th Five-Year Plans, the proposed GDP growth rates of each province/city is much higher than the national level, which is also an important driving factor for the t economic growth(see box 3).

4.3 Environmental and economic pressures faced in 11th Five Year- based on 3E model simulations

4.3.1 Simulation and forecast

During the 11th Five Year, China’s economy will continue to grow at high speed, with the average annual growth rate at 9% or higher. Based on 3E model, we simulated three different scenarios of economic growth: higher speed, medium speed and lower speed.

In higher-speed scenario: It is assumed that, during the 11th Five Year, China will follow the scientific view of development, and fully implement the national strategy of creating an innovative country, independent innovation will have important breakthroughs, urbanization will progress smoothly, approaches of economic growth will have major improvements, international trade will continue to grow at high speed, and many problems in current economic development will be successfully solved. Based on these assumptions, total factor productivity will continue to increase stably and rapidly, reach 3%, much higher than the average level in past 20 years (2.6%) .

In medium-speed scenario: It is assumed that, although China has entered into a new rapid growth period, accumulated problems will become prominent. Institutional reform will continue but will face more difficulties; more time will be needed to fully implement the national strategy of creating an innovative country; independent innovation will need accumulated capacity; urbanization progress will be hampered by social security and other issues, and growth of international trade will probably slow down. Based on these assumptions, total factor productivity will maintain the same average level in past 20 and more years (2.6%).

In lower-speed scenario: It is assumed that, China will face many risks in economic development. For example, institutional reform will continue but will face more difficulties; independent innovation will not make great progresses during the 11th Five Year; progress of urbanization will be disturbed by social security and other issues; economic growth approach will be hard to change; appreciation of RMB will constrain export and will slow down the inflow of foreign investment; and prices of basic resources and energy sources will keep rising. Based on these assumptions, total factor productivity will drop down from 2.6% to 2.2%.

The forecast results of main indicators in three different scenarios is as following (see table 2),

Table 2 Forecasts of economic indicators in three different scenarios (growth rate, %)

4.3.2 Forecast of industries’ structural change

In each scenario, it is invariably predicted that, during the 11th Five Year, China’s industrial structure will continue to shift towards heavy and chemical industry (see prediction results in Table 5). Growth rates in industries such as ferrous melting, non-ferrous melting, oil processing, coal and charcoal, cement and other construction materials, heavy chemistry machinery, and auto manufacturing etc., will be slightly higher than overall economic growth rate. Weight of heavy chemistry industry will grow to some extent. This will exert substantial pressures on China’s environment and resources.

Table 3 Growth speed forecast of total output in major sectors during 11th Five Year