The scientific development concept dominates the Eleventh Five-Year Plan (hereinafter referred to as "the Plan"), the blueprint of China's social and economic future. Its implementation focuses on several strategic and administrative issues including developing the rural area, modernizing the industrial structure, coordinating regional development, sensibly deploying resources, protecting the environment, carrying out systematic reforms, continuing relaxation policy and seeking social harmony, etc. As a new feature, the emphasis is put on innovation and social harmony, and the concept of new rural area is also introduced.

In terms of economic development, the Plan calls for pursuing more comprehensive, coordinated, healthy and sustainable growth while maintaining reasonable growth momentum. There are three layers of policy thinking. The first layer concerns the systematic reform. More in-depth reforms in administrative, corporate, fiscal, financial, technological, innovative and social security fronts will help create a better institutional environment for economic growth. The second is the structural improvement. Balances are sought between the development of urban and rural areas, different geographical regions, primary, secondary and tertiary industries, as well as internal and external demands, investment and consumption. The third is the improvement in quality and efficiency. The growth model should focus on migrating from the one relying on quantitative and extensive expansion to the one with higher quality, efficiency, greater technology contents and value added, but less burden on resources, environment and the society, etc.

In general, the Plan sets the development goals from a higher level perspective, targeting the various bottlenecks and potential risks inherited in the current growth model, such as the system, resources and technology constraints as well as the many structural imbalances at the macro and micro level. Although realistically, one should not expect all the problems be solved within the five-year period, China's economy is expected to embark on a more rational and stable growth track if the Plan can be implemented effectively. As for the Hong Kong economy that tracks closely with the Mainland development, the fact that China has a more sustainable growth and lower systematic risks will certainly boost confidence and post more benefits.

Enlarged investment opportunities and market size

Within the next five years, the profound changes taking place in the Mainland will provide more development opportunities for Hong Kong, especially in the following two areas.

A. Industry transformation

The Plan highlights the importance of facilitating the structural transformation of China's industries. The three emphases are advanced manufacturing, service, and basic industry and infrastructure. The core initiative lies in innovation that will essentially boost the technological know-how. Its implementation will have multiple impacts on Hong Kong. It will directly lead to more investment and business opportunities. Take Mainland's efforts to upgrade its manufacturing technologies, boost energy, transportation and information infrastructure constructions, promote modern agriculture, energy conservation and environment protection for example, they will lead to greater demands for capitals. This in turn will create new outlets for Hong Kong capitals and new financial intermediation opportunities. On the other hand, Mainland's industrial efforts are directed at lifting both the service quality and the whole service sector. Such a process will set higher standards on the degrees of market orientation and standardization. Therefore, it is believed to be accompanied by further relaxation of entry barriers and adoption of international best practices. Hong Kong's service sector, which commands clear comparative advantages but faces a saturated local market, can capitalize on such expansion opportunities. Seizing the urgent demands from the Mainland, Hong Kong can leverage on its proven strengths in internationalization and marketing to complement the Mainland's advantages in technology and research so as to nurture core technologies and international brands that bear China's own intellectual properties. By doing so, Hong Kong would not only echo the nation development, but also find its new position in the international value chain.

B. Coordinated development of the urban/rural and regional areas

China is drafting the unified development plans for both urban and rural areas. The rural development becomes one of the highlights of the Plan, including the rural reform, fine-tuning the strategies of promoting agriculture through industrialization and building up the rural areas through urbanization, developing modern agriculture and improving the livelihood of the peasants. It is believed that policy favors, capitals and technological supports will fuel more rural development. As a largely unexplored market, once the rural demands are unlocked given rising incomes or such expectations, tremendous momentum can be added to China's growth. Investors, Hong Kong's included, will be richly rewarded.

As another major policy objective, the coordinated developments of the Eastern, Middle and Western regions of China are pursued in order to make sound and unique regional progress. This implies the layered market hinterland and various cooperation mechanisms. For example, the Plan expects the more developed Eastern region to take on the task of enhancing its innovation capacity, improving its industrial structure, modifying its growth model, and driving other areas. This is demand driven technologically and systematically. Core technology is to be obtained, modern service is to be developed, market mechanism is to be perfected, and higher requirements are placed upon resources utilization and environmental protection. As for the Western region, basic infrastructure is in urgent need given its unique natural resources based industries. The Middle area should concentrate on energy production and some manufacturing which it has comparative advantages. Infrastructure and market system is also the key. The traditional Northeast industrial base should spearhead in advanced agriculture and manufactruing, suggesting its unique need to modify industrial structure and carry out state owned enterprises reforms and restructuring. Such diversified approaches, policy emphases and demands will create more room for Hong Kong's industry migration. For example, traditional manufacturers that operate in the Pearl River Delta can move further North and expand to the Midwest. Hong Kong's advantages in terms of capital, corporate governance, finance, internationalization, and sound market economy should find their roles to play in those different areas and help solidify and enhance Hong Kong's own status.

The regional development strategy also aims at perfecting the regional coordination and interaction mechanism in order to dismantle the administrative barriers between different geographical regions, promote the free float of production elements, facilitate industrial migration, and support economic, technological and human resource cooperation. A well developed coordination mechanism should provide a better platform between Hong Kong and the Mainland for cross border infrastructure connection, environmental protection, market entry, and investment protection, etc.

New challenges

While giving more roles for Hong Kong to play, the expected transformation in the Mainland also challenges Hong Kong's traditional edge and magnifies Hong Kong's weakness. The pressure is two folded.

The first lies in the elevated barriers in terms of technology, resource and environment, etc. Investors from Hong Kong and overseas will face more stringent requirements in these areas. The policy of active foreign investments attraction to avoid capital shortage has already given way to selecting high quality investments. The preferential treatments granted to foreign investments will be phased out, setting in motion the legislative procedure of unifying tax treatments on domestic and foreign investors. Local governments will also cut back their blind enthusiasm of attracting foreign investments. Thus it is a matter of time when will be the end of preferential treatments. Other policy preferences are expected to show divergence as well. Supports will be withdrawn from those enterprises struggling with technology content, resources utilization and environmental protection issues. Worse yet, they could be short-listed for restriction. The enforcement of energy conservation and environmental protection could directly increase the enterprises'overheads. Hong Kong businesses could bear the brunt of such changes because many are in the processing business with low technology content and low value added. As science and technology are not Hong Kong strengths, local supports may not be enough to see them through.

The second lies in heightened competition. As more foreign enterprises enter China market after its further opening, state owned enterprises reforms help improve their operation, and private enterprises also grow into shape with various policy supports, competition is bound to heat up and challenges will arise for Hong Kong businesses. On the municipal level, developing the service sector is not only the target of the modified industrial structure, but also the position and objective of the Eastern region development. The Plan calls for the major cities to develop financial service, insurance, logistics, information technology and legal advisory in higher priority. Cities, such as Shanghai and Guangzhou, all set the goals of building international or regional financial and logistics centers in their city planning, coupled with policy supports. Although Hong Kong's edge in the service sector cannot be overtaken by the Mainland in the short run, and its status as an international center is also difficult to be replaced, heightened competitive pressure from the Mainland will set the tone for its development trend.

To summarize, both opportunities and challenges abound from the Mainland's development. Hong Kong must make early preparations and adapt quickly, continue to solidify its market system and internationalization advantages, improve its innovative capacity and strengthen both communication and coordination with the Mainland. For the first time in the Central Government's planning, Hong Kong is mentioned and pledges are made to uphold Hong Kong's international centers status and strengthen cooperation. Nevertheless, this is more of a symbolic gesture aimed at clarifying the Central Government's stance instead of making detailed plans on behalf of Hong Kong. Under the framework of one country, two systems, Central Government does not take Hong Kong into the national administrative planning. Facing profound changes, whether Hong Kong should continue to leave future developments completely to the market or mandate its own Government to play a more active role and create favorable conditions/facilitation guidelines should be opened for meaningful discussion.