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Date: 6 October 2020 Author: Paweł Paszak

Preparations for the adoption of the 2021-2025 Five-Year Plan

On Monday (September 28), during the meeting of the Politburo of the Chinese Communist Party (CCP), a date was set for the fall plenary session of the Central Committee during which key decisions on the directions of development for the upcoming years are to be taken. The session will take place on October 26-29. The 2021-2025 Five-Year Plan and the Economic and Social Development Plan with its 2035 targets will be the focal points of the agenda of the fall plenary. In many respects, these decisions will be unique because China has not faced so many complex challenges since the beginning of its economic transition under the CCP.

SOURCE: KREMLIN.RU

According to International Monetary Fund economists, the pandemic led to the most serious economic collapse since the 1930s. The recession in 2020 is expected to be 4.9% in the global perspective, and in the case of the Eurozone or the United States these indicators will reach -10.2% and -8% respectively. China is expected to be the only economic power to grow (+1.2%), but due to the high level of interdependence it will also experience a demand shock in the western markets. According to the World Bank’s forecast, next year the GDP of the People’s Republic of China (PRC) is expected to grow by 6.9%, whilst the IMF predicts a possible growth of 8.2%.

The economic difficulties associated with the global health crisis overlap with the structural problems of the Chinese economy, the key factors being the rapidly increasing household debt and the persistent real estate bubble. Since 2008, the level of the household debt has increased from 17.87% of GDP to over 56% of GDP and from 40% to 120% of disposable income. This is compounded by: inefficient government investment programs, shadow banking, risky loans (about 15-16%), an operational model of industrial development in addition to excessive Party and state interference in the market. Growing consumer aspirations of the largest and the most diverse Chinese middle class, will increase the internal pressure to maintain favorable material conditions. So far, public support for the system has largely resulted from the Party’s ability to create opportunities for meeting consumption needs.

The authorities of the CCP are forced to operate in an increasingly demanding international environment, which is more and more concerned about the economic development of the PRC. During Xi Jinping’s reign, China’s relations with the United States, Japan and India were in a downward spiral with a simultaneous and increasingly assertive position of the EU. In recent months, the United States has introduced a number of sanctions and restrictions against the Chinese company Huawei, which have clearly made it difficult to sell the most advanced microprocessors and use Android software. The key European Union countries (Germany, France, Italy, Poland) also intend to significantly limit Huawei’s participation in the construction of the European 5G network. In recent years, the EU has consistently sought to develop a “level playing field,” which means eliminating or reducing asymmetries in economic cooperation. The variant of globalization, which has enabled China’s unhampered economic growth, especially after 2001, has therefore clearly changed.

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How does the CCP intend to react to this complex situation? The key to achieving high growth rates and advancing in international value chains is, as in previous years, progress through innovation. The digital technologies sector, artificial intelligence and the semiconductor industry are among the main directions of development. So far, the PRC authorities have paid a lot of attention to these areas, as evidenced by the number of programs, such as: Made in China 2025, New Generation Artificial Intelligence Development Plan (新一代人工智能的发展计划) and China Standard 2035 (中国标准2035). In view of an increasingly limited access to microprocessors, increased state interference in this sector should be expected through the introduction of tax exemptions, subsidies and preferential credits.

The strategy of “dual circulation,” presented by Xi Jinping, has become famous in official discourse in recent weeks. It stresses the need to strengthen the role of the internal market and services, while maintaining cooperation with foreign markets. It will most likely involve further attempts to become independent of high technology imports as well as to strengthen the position of domestic manufacturers. In an extensive article in the People’s Daily of September 30, 2020, Prime Minister Li Keqiang also pointed out the need to decentralize and liberalize the services sector as well as create a friendly ecosystem for foreign investors.

The classic tool for creating growth are investments, although there has been a clear change in the areas of their implementation. More funds are to be used to create the so-called “new infrastructure” (新型基础). During the session of the National People’s Congress of the People’s Republic of China in May, it was agreed that by 2035 the state will allocate about USD 1.4 trillion for the construction of digital infrastructure in seven selected areas. These include: 5G network, industrial Internet, modern transport, data processing centers, artificial intelligence, high voltage networks and electric car charging stations.

A significant element of the plan remains the Chinese variant of the “green deal,” which, as announced by President Xi on September 23, is expected to make China climate-neutral by 2060. The pursuit of improving air, soil and water quality is both a response to social and international expectations as well as economic opportunities in the area of “green technologies” and energy. Increasing the share of nuclear, hydro and solar power will accelerate the country’s energy transformation and open new opportunities to export these technologies abroad, especially to the developing countries.

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