How the coronavirus and US-China conflict are driving Beijing’s domestic focus in the new five-year plan

China has moved away from its ‘reform and opening up’ approach and turned to domestic development with a new emphasis on self-reliance, technology and quality growth
The shifting geopolitical landscape and uncertainty over domestic and international consumer demand in a post-pandemic world suggest a bumpy road ahead

Hao Zhou

Published: 3:30am, 4 Nov 2020

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As a centrally planned economy, China has followed a carefully calibrated long-term strategy and made significant breakthroughs in the global system. Therefore, its new five-year plan has attracted much attention.

The Communist Party concluded the fifth plenum of the 19th Central Committee last week and unveiled the key components of the 14th five-year plan. As the first detailed strategic road map under the new “dual circulation” strategy, it provides a policy framework to analyse the Chinese economy.

In summing up the previous five-year plan in a few keywords, “Made in China 2025” should be highlighted. This is a national strategic plan to develop the country’s manufacturing sector, issued by Premier Li Keqiang and his cabinet in May 2015. As part of its 13th five-year plan, China aimed to move away from being merely the “world’s factory” and producing cheap, low-tech goods through lower labour costs and supply chain advantages.

However, China’s aggressive, ambitious approach has drawn criticism as many saw that Beijing was targeting key technology and sectors in other countries. This has generated widespread discomfort and became a catalyst for a rise in anti-China sentiment in the US and elsewhere. To help ease such concerns, Beijing has tried to tone down its ambitions for the programme.

While China might need to improve the way it implements its strategies, Beijing still favours national planning to manage the world’s second-largest economy. As such, one should pay careful attention to its five-year plans to gauge policy priorities from Chinese policymakers’ perspective.

03:05

What happened at the Chinese Communist Party’s major policy meeting, the fifth plenum?

There are three keywords in the new five-year plan. The first is “self-reliance”. During this five-year plan, China will speed up its promotion of a new development pattern in which domestic and foreign markets boost each other while the domestic market remains the focus.

China has turned its focus to domestic development and placed new emphasis on pursuing self-reliance. This is a clear shift in strategy from the “reform and opening up” approach that had been the focus for four decades, and is probably an inevitable outcome given the changing geopolitical landscape.

The US has also made dramatic changes in its approach to China and highlighted the importance of containing China’s rise. As such, China’s renewed focus on promoting domestic development suggests it is preparing for a protracted struggle.

However, the road to achieving self-reliance is a difficult one. It requires China to generate more domestic demand, which will be harder in a post-pandemic world as income growth is likely to stagnate.

01:56

What’s the beef with the ‘Made in China 2025’ strategy?

The second keyword is “technology”. Chinese policymakers have made it clear that their top priority is upholding the central role of innovation in the country’s modernisation drive and implementing an innovation-driven development strategy.

According to a communique released after the plenum, the real economy must remain China’s focus for economic development, and it must build itself into a manufacturer of quality while enhancing its strength in cyberspace and digital technology. By making breakthroughs in core technologies in key areas, China will become a global leader in innovation.

The US-China conflict in the past few years has led Beijing to realise that dominance in core technologies is crucial to secure the upper hand. China’s weakness in innovation is a key reason its total factor productivity has steadily diminished in the past decade. Instead, investment has been the primary contributor to economic growth, resulting in growing debt levels which subsequently raise risks in the financial system.

The third keyword is “quality”. There is no specific growth target in the new five-year plan. In previous plans, China typically provided one. For example, the 13th five-year plan stated that growth needed to maintain a certain speed to ensure that GDP and the per capita income of both rural and urban residents doubled by 2020 compared to 2010. This provision suggested that the annual growth rate had to be no less than 6.5 per cent between 2015 and 2020.

In recent years, Beijing has moved away from setting an explicit growth target, and policymakers appear to have brought this approach into the new five-year plan. However, China still has big ambitions; its leaders have projected that the country’s per capita GDP will reach the level of moderately developed countries by 2035.

While there is no global standard for a “moderately developed country”, a reasonable estimate is that China intends to bring its per capita GDP to a level close to an eastern European country such as Poland, Hungary or the Czech Republic. In other words, China will expend great effort to avoid falling into the middle-income trap.

Extrapolating from linear GDP projections, China’s level of nominal GDP is likely to surpass that of the US some time between 2025 and 2030. As a result, how best to deal with China’s rise will remain an important theme for Western countries.

China has laid out its new strategic framework in its latest five-year plan as a response to changing geopolitical dynamics. There is little doubt that this strategy will face strong headwinds. There are also tremendous uncertainties about the world after Covid-19, which suggests the road ahead will be bumpier than many expect.

Hao Zhou is senior emerging markets economist at Commerzbank