An Analysis of China’s 14th Five-Year Plan

Between March 4th and March 11th, 2021, the annual “Two Sessions” were held in Beijing. The Two Sessions are the annual gatherings of China’s two major political bodies, the Chinese People’s Political Consultative Conference (CPPCC) and the National People’s Congress (NPC). The Two Sessions are organized every year and the purpose is for the Chinese government to review its progress over the past year and announce major policies for the upcoming year. This year the Two Sessions were of increased importance as the policy announcements would include the publication of the 14th Five Year Plan (2021-2025).
 
During this year’s Two Sessions two key policy documents were released. Firstly, the aforementioned 14th Five Year Plan which sets out China’s blueprint for economic and social policy development for the upcoming five years, and secondly the Government Work Report. In addition to the policy priorities for the upcoming five years, the 14th Five Year Plan further stipulates the Chinese government’s long-term goals until 2035. Whereas the Government Work Report reviews the government’s accomplishments over the last year and provides general guidance on the government’s social and economic policy direction for year (2021).
 
In this article we discuss the key takeaways of the published 14th Five Year Plan and its implications on a broader macroeconomic level. In our subsequent article, we will further discuss the Government Work Report and how this will directly affect foreign-invested enterprises throughout the upcoming year.

Background

On March 11th the NPC issued the “Outline of the 14th Five-Year Plan for National Economic and Social Development of the People's Republic of China and the Long-Range Objectives Through the Year 2035”, better known as the 14th Five-Year Plan. The document is an economic blueprint for the development of the Chinese economy as set out by the Chinese government for the coming five-year period. It provides guidance for new medium and long-term macroeconomic plans for the period from 2021 to 2035. It is a proposal to improve the domestic social economic system and stimulate numerous market forces.
 
The proposal for the 14th Five-Year Plan was submitted by the fifth plenum of the Chinese Communist Party’s 19th Central Committee in October 2020. At the plenum it was declared that China had achieved its critical political goal of becoming a “moderately prosperous society” by 2020. By the end of last year, China’s economy surpassed 100 trillion yuan (equivalent of $15.4 trillion) of annual gross domestic product (GDP) for the first time in its history, while GDP per capita exceeded $10,000. This figure was higher compared to the government planned forecast of 92.7 trillion yuan in GDP. In addition, China created 60 million jobs in its urban areas over the past half-decade and implemented basic medical insurance coverage for 1.3 billion citizens as well as basic pension support for approximately 1 billion citizens by the end of 2020.
 
In prospect offered during the plenum, it was emphasized that the 14th Five-Year Plan would build upon the principles of the 13th Five-Year Plan concerning innovation, regional coordination, green development, international openness, social equity and improvements to the social credit system.

Focus points of the 14th Five-Year Plan

The 14th Five-Year Plan contains a total of 142 pages, including 19 chapters with in total 65 articles. In general, the main areas on which the Five-Year Plan focuses includes the following:
 
  • Improving the quality and effectiveness of development and maintaining a sustained and healthy economic growth;
  • A pursuit of innovation-driven development and an acceleration of the modernization of the industrial system;
  • Development of a robust domestic market and fostering a new development pattern, the so-called “Dual Circulation Strategy”;
  • Advancing rural revitalization across the board and improving the new urbanization strategy;
  • Improving regional economic structures and promoting coordinated regional development;
  • Advancing reform and opening-up across the board and bolstering the momentum and vitality of development;
  • Promoting green development and ensuring harmony between humanity and nature;
  • Improving people’s wellbeing and striving for common prosperity.
Below we elaborate on the above-mentioned focus points in more detail.
Improving the quality and effectiveness of development and maintaining sustained and healthy economic growth
For the first time since the implementation of Five-Year Plans in 1953, the plan does not include a specific GDP growth target and instead specified that the growth should be kept in “reasonable range” and an annual target would be set based on the specific conditions each year. Other major economic indicators will also be kept in an appropriate range, ensuring that overall labor productivity grows faster than GDP, keeping prices stable and keep the surveyed urban unemployment rate within 5.5 percent.
A pursuit of innovation-driven development and an acceleration of the modernization of the industrial system
Innovation remains at the heart of China’s modernization drive. The main target of the 14th Five-Year Plan is to strive for a 7% annual growth in R&D spending. The strategy’s innovation-driven development will focus on integrating and optimizing the allocation of scientific and technological resources, strengthening of original and leading scientific and technological research, strengthening of basic research, and the building of major scientific and technological innovation platforms. Key focus areas for scientific and technological research include:
 
  • Artificial intelligence.
  • Quantum information.
  • Integrated circuits.
  • Brain science.
  • Gene and biotechnology.
  • Medicine and health.
  • Deep space, deep sea and polar exploration.
In order to accelerate the development of a modern industrial system and develop the real economy, the 14th Five-Year Plan further lays out a manufacturing power strategy. This strategy focus on eight core industries, namely:
 
  • Rare earths and special materials.
  • Major equipment used in shipbuilding, aviation and high-speed rail.
  • Robotics.
  • Aircraft engines.
  • Industrial applications of China’s Beidou global navigation satellite system.
  • New energy vehicles and smart cars.
  • High-end medical equipment and innovative medicine such as vaccines.
  • Agricultural machinery.
Another key focus of China’s 14th Five-Year Plan is “Building Digital China”. Here, a major target is to increase the percentage of the digital economy core industry added value to GDP to 10%. The strategy includes strengthening the innovative application of key digital technologies, accelerating the promotion of digital industrialization and promoting the digital transformation of the industry. This however also includes the establishment and improvement of market rules for data elements and the creation of a standardized and orderly policy environment. This does entail as well a crackdown on monopolies and unfair competition, meaning that the big platform companies such as Tencent and Alibaba will come under even further scrutiny.
Development of a robust domestic market and fostering a new development pattern, the “Dual Circulation Strategy”
China’s 14th Five-Year Plan implements the idea of “dual circulation” as a core concept for future economic growth of the country. By implementing this strategy, China will reduce its dependence on overseas markets and technology in the long-term. China will rely mainly on “internal circulation”, which means that the domestic cycle of production, distribution and consumption will be supported by innovation and upgrading of the economy. In simple terms, the dual circulation strategy will offer future guidance towards more reliance on domestic consumption (internal circulation), but it will not turn away from the support required from the global market (external circulation).
 
With respect to global market, the strategy as elaborated in the Five-Year Plan intends to lower import tariffs and trade barriers, improve export policies, improve the level of international two-way investment and to continue the organization of international exhibitions (such as the China International Import Expo, China Import and Export Fair, and the China International Trade in Services Fair).
Advancing rural revitalization across the board and improving the new urbanization strategy
The development of agriculture and rural areas in China remains a top priority for the government. As China has limited arable land compared to its landmass, food security is a key focus for the country as a whole. Furthermore, even though extreme poverty has been successfully eradicated, many citizens in rural areas will be vulnerable to fall back into poverty, so policies will remain a focus on rural revitalization.
 
On the other hand, the strategy aims to increase the urbanization of the population. The target is that by 2025 the percentage of permanent urban residents will be 65% of China’s total population. This will be achieved by granting permanent urban residency faster to people who move to cities from rural areas.
Improving regional economic structures and promoting coordinated regional development
The 14th Five-Year Plan aims to continue to implementation of major regional development strategies such as the development of the Beijing-Tianjin-Hebei region, the Yangtze Economic Belt, the Guangdong-Hong Kong-Macao Greater Bay Area, the Xiongan New Area and the Chengdu-Chongqing economic zone.
Advancing reform and opening-up across the board and bolstering the momentum and vitality of development
In the Five-Year Plan, promises are made to create a better development environment for private businesses by an all-round improvement in the property rights system and a modernization of fiscal-, taxation- and financial systems. In addition, the Chinese government intends to promote the development of a higher-standard open economy, mainly through further development of the One Belt One Road initiative.
Promoting green development and ensuring harmony between humanity and nature
The plan further includes big targets on green development to combat climate change. As China aims to peak CO2 emissions by 2030, the 14th Five-Year Plan provides specifications to ensure that it will meet this target. China will also expedite the transition of China’s growth model to one of green development, and promote both high-quality economic growth and high-standard environmental protection. Energy consumption per unit of GDP and carbon dioxide emissions per unit of GDP will be reduced by 13.5 percent and 18 percent, respectively.
Improving people’s wellbeing and striving for common prosperity
In order to improve the wellbeing of the population, the plan will focus on increasing employment, expanding the size of the middle-income group, improving the quality of the education system and developing a strong public health system. Key targets include:
 
  • Annual growth in disposable income per capita the next five years in line with the GDP growth;
  • Raising of the average life expectancy by 1 year by 2025;
  • Implementing basic old-age insurance to cover 95% of the population.

Conclusion

Even though a majority of the targets as set out in the 13th Five-Year Plan were achieved, it must be noted that China did not meet its GDP growth target, although this can mainly be attributed to the global outbreak of COVID-19. This has most probably resulted in a more conservative approach to growth, which is evidenced by the lack of a specification of a target on GDP growth. This in turn may signal a shift away from high-speed growth to high quality growth.
 
Moreover, influenced by external factors, the 14th Five-Year Plan has a strong focus on innovation and upgrading of the manufacturing capabilities within the Chinese economy. To ensure national security and avoid supply chain disruptions due to global geopolitical tensions, China aims for more self-sufficiency in key industries. At the same time, the country aims to make the economy overall less reliant on the global markets, by developing a strong internal market to increase domestic consumption as a driver of economic growth, while remaining open for foreign investment into the Chinese economy. These strategies sit at the core of the so-called “dual circulation strategy”, which will be a key strategy guiding Chinese government policy in the foreseeable future.
 
In our second article on the “Two Sessions” we discuss the Government Work Report, the targets which the Chinese authorities have set for 2021, new policies to be implemented in the coming year and how this will affect foreign-invested enterprises active in China. Read the article here.
 
If you have questions about how the 14th Five-Year Plan or Government Work Report affects your company, don’t hesitate to contact us at info@msadvisory.com.

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