Principal and Director of Analysis
China's Five-Year Plan to emphasise economic security, send mixed signals to businesses
- Asia Pacific
- Political and Economic Risk Consulting
China's Five-Year Plan to emphasise economic security, send mixed signals to businesses
The annual session of China’s National People’s Congress (NPC, legislature) is taking place in Beijing until 11 March. It will approve the 14th Five-Year Plan (FYP) for National Economic and Social Development.
- The FYP – for the period 2021-25 – will expound big themes and broad goals, but details will mostly be left to sectoral and regional plans later in the year.
- A “new development paradigm” and “dual circulation system” will not pursue autarky but will intensify efforts to reduce dependence on foreign technology and supply chains.
- The plan will also call for boosting domestic demand and continuing market reform and opening; however, resulting opportunities for multinationals may be narrow and challenging.
- The US government, as it begins reviewing China policy and supply chain security, will view the plan as confirming a trajectory of intense bilateral competition.
Prepare to parse plans
Veterans of China’s NPC and FYP seasons are rather jaded by these affairs, as people often expect sudden new policies or detailed plans. In reality, these events usually involve dissecting long speeches and documents reiterating existing principles and goals, and vaguely stating new ones. Some important quantitative targets and indicators can be gleaned, but most details are left to industry-, issue- and region-specific plans, which emerge later in the year (and get much less attention).
FYI on FYP
China’s five-year plans (FYPs) are a legacy of its truly centrally planned socialist economy before 1980. That era is gone, but the FYPs remain an important part of Beijing’s process for making, reviewing, and adjusting policy. They help work through major differences among stakeholders within the system, and co-ordinate short- and long-term policy.
The significance of FYPs is often misunderstood or over-estimated by outside observers: the national FYP outline unveiled every five years at the NPC is essentially a broad, high-level document, with details left to sectoral and regional plans in subsequent months. These are being developed in-line with the overall FYPs key priorities, themes and targets.
Timing and context
The FYP, in turn, is heavily guided by existing, even longer-term policies and strategic priorities, and is rarely a radical departure. That will be true of the 14th FYP in the context of long-term, landmarks and goals set around the year’s 100th anniversary of the founding of the People’s Republic of China (PRC):
- 2021: Beijing will announce sometime this year that it has achieved its goal of building a “moderately prosperous society” by 2021.
- 2035: Goals for 2035 are being drafted alongside FYP. This is the mid-point between 2021 and 2049 centennials and goals.
- 2049: The party aims to build a “prosperous, strong, democratic, culturally advanced, harmonious and modern socialist country” by 2049.
The drafting process for the FYP started in 2019. Extensive “proposals” were reviewed at the ruling CPC Central Committee plenum last October and released shortly after. The proposals guided finalisation of the plan, which will be approved and unveiled at the annual NPC session which started on 5 March.
Nonetheless, the NPC and FYP matter – this year, perhaps, more than most. It is tempting to dismiss their contents as empty political jargon, but official terminology reflects concepts and priorities which influence policy and signal intent. Between the NPC’s agenda, the FYP, and “long-range objectives” for 2035, there are too many policy issues and goals to cover in detail here, but some key themes stand out. The perennial top priority is the primacy of the Communist Party of China (CPC) under the “party centre” (meaning President Xi Jinping). Beyond that, core features include:
- Xi’s shifts: Xi believes China is in an historic window of opportunity, both for its place in the world and for making transformative domestic shifts. He says China has entered a “new development stage” requiring a “new development philosophy”. This is largely repackaging existing approaches like “people-centred development” and “supply-side structural reform”, but this updated agenda adds renewed political weight, and soon some ambitious targets. Xi has signalled that his long-term vision will not be sacrificed to short-term pressures despite 2020’s traumas.
- Economic security: The “dual circulation” system is a major feature of planning for this new development stage. The leadership wants to emphasise the domestic economy as the key driver of growth, and reduce vulnerability to global economic turbulence or external disruption (such as from US export controls). Beijing has sought for many years to rebalance growth towards domestic consumption, and upgrade domestic industry and technology with “Made in China 2025” and “indigenous innovation” strategies. However, the FYP will mandate even greater urgency in the context of weak global demand and increasing US-led pressure on China.
- Continued reform: Xi and his top economic officials have stressed that dual circulation is “absolutely not” about closing the domestic economy or seeking self-sufficiency. Beijing is keen to deter international perceptions that it is turning inwards, but its goal genuinely is not autarky, or reversing decades of “reform and opening up”. The FYP will retain a policy of “comprehensively deepening reform” and call for “a new system of opening up to the outside world”.
Xi’s three news
Official pronouncements in recent months suggest that Xi’s three-fold “new development” concept will be a guiding theme for policy planning in the next FYP period. The three components are:p>
- “New development stage”: This states that China is entering a new development period: 2021-2049. This puts plans in the historical context of China’s national rejuvenation narrative. This is a patriotic rallying theme, but also a reminder that the party brought about the rejuvenation achievements to date, and people should follow the party through coming challenges, as it leads China on this long-term mission.
- “New development philosophy”: This declares a new understanding of what development should mean, beyond GDP growth: namely, “innovative, co-ordinated, green, open and shared” development. As well as the intense focus on innovation, science and technology, this “philosophy” encapsulates existing concepts like quality of growth, and more of equitable, “people-centred” development. The “green” and “open” components are also important, as noted below.
- “New development paradigm”: This captures dual circulation. As one official summary explains: “It is a major strategic task for China’s overall development to establish at a faster pace the new development paradigm featuring dual circulation, in which domestic and overseas circulations reinforce each other, with the domestic market as the mainstay. …Only upon standing on our own feet to smooth out the domestic circulation, can we survive and develop full of vitality despite the changes internationally”.
The US and many others will view this with great scepticism. A 5 January Congressional Research Service (CRS) report on FYP prospects said China will “expand the state’s role in the economy and advance national economic security interests; use market restrictions… to foster Chinese-controlled supply chains; and sharpen the use of antitrust, intellectual property (IP), and standards tools to advance industrial policies.” It said: “Plans for new market openings are limited to trade zones and areas where China seeks foreign expertise (emerging technologies and education) and capital (financial services)”.
In today’s global context, China stands out as the only major economy that is growing, with a basically unchallenged government focused on an ambitious long-term development strategy. However, despite this relative strength and stability, Beijing seems to face severe policy contradictions:
- It wants to increase industrial self-reliance including with import substitution, but also wants to retain foreign investment, and position China as a defender of stable trade and multilateralism.
- It insists on a strong state sector and wields regulatory power to align businesses with national goals, but also seeks competitive, innovative companies and a more market-driven economy.
- It made reducing risks in the financial system a “critical battle” and signalled tolerance for more defaults of state-own enterprises (SOEs) in late 2020, but it prizes stability and fears shaking confidence in financial markets.
These contradictions will present major challenges as bureaucrats and local leaders work to translate top-level FYP objectives into more detailed plans and decisions. For example, several industries and provinces will struggle to balance Xi’s carbon emissions targets with sustaining growth and employment.
Acknowledging such tensions, the FYP is likely to bring another step in China’s gradual de-emphasising of GDP growth rates. For the first time, the NPC in 2020 did not fix an annual growth target, instead emphasising job creation and consumer price inflation. Targets remain important guides within China’s system, and signal at home and abroad that China’s growth machine is on track despite global problems. However, there have been calls for a new approach to targets, using metrics like inequality, energy and land utilisation, productivity or government debt, to better reflect Xi’s “new development philosophy”.
On the opening day of the NPC session, the government said it will target a GDP growth rate of over 6% in 2021, but this is akin to not setting a target, since growth will easily exceed that level in 2021 (due to the unprecedented low base of 2020). While leaders stated a goal of “at least 6.5%” average annual GDP growth in the 2016-20 FYP, no such target has yet been stated for the 2021-25 FYP period.
Mixed signals for multinationals
Beijing’s agenda means foreign businesses also face contradictions. The day-to-day business and bureaucratic environment is generally improving, but with rising regulatory challenges in specific areas, such as compliance with cyber security and data rules. Amid stagnation in most other markets, China’s commercial appeal is as strong as ever, but China’s industry policy means multinationals might only sustain large market share as long as China has no domestic substitute or strategic interest. Meanwhile, in sensitive or strategic areas, the further multinational companies go to address regulatory or reputational risks in China, the more they risk aggravating government or public concerns elsewhere.