This article first appeared in Forum, The Edge Malaysia Weekly on October 5, 2020 - October 11, 2020

As all eyes are focused on the US presidential election on Nov 3, another highly consequential political event will soon take place in China. In late October, the fifth Plenum of the current Chinese Communist Party’s (CCP) Central Committee will probably approve the outlines of the country’s 14th Five-Year Plan. The plan will serve as a roadmap of how China intends to adapt to a new world, one marked by growing American hostility, rapidly evolving technological disruptions and the widening impact of climate change. A new model of development is needed to confront these challenges as well as overcome domestic headwinds such as a gradually declining labour force, rising labour and other costs, imbalances in finance and investment, and still-high disparities in income and wealth.

Since China now makes up about 18% of the global economy, whatever it does has huge implications for the rest of the world. Over the past few months, the authorities have been giving hints as to the broad strategies that will be ratified in the final Plan. In essence, China’s planners will seek to rebalance the economy — making it more self-reliant in its sources of demand as well as technology while taking steps to reduce structural weaknesses. The result should be a vibrant Chinese economy, characterised by slower but higher-quality growth and one that is much more resilient. A key question, though, is whether China can pull this off without reforming some parts of its political system.

First, all plans are political in nature and this one will be no different. There are two likely political angles to this plan. One is to further entrench President Xi Jinping’s position as he prepares for the 2022 CCP congress. At that congress, it is likely that he will not follow the once-accepted practice of leaders stepping down after two terms in office. Only recently, a party document seemed to name him as the “core” leader, a term once reserved only for the founder of the People’s Republic of China, Mao Zedong. By placing his imprint on the plan, Xi will position himself as an indispensable leader whose wise counsel the country will still need after 2022. Another important political aim is to use the plan to show the world the superiority of China’s “socialism with Chinese characteristics”. Chinese leaders will contrast the bold visions and grand ambitions in this coming plan against the supposed incoherence and loss of direction in the US and its allies.

Second, the plan will embody a clear shift in development strategy. It will downplay the target of achieving a certain rate of growth every year while broadening the objective beyond just growth to include resilience — particularly resilience to the US’ hostility. China’s leaders appear to have concluded that no matter who is in charge in the US after November, the country is likely to be more unfriendly in future. The US is seen as seeking to undercut China’s rise through hostile policies on trade, technology and finance. China also fears that the US will use its considerable global influence to press other countries to join it in trying to trip China up. China will thus have to be less reliant on foreign demand for its exports while also developing its own technological and financial prowess. But its leaders also appreciate that engagement with the outside world is vital — so, the question the plan has to answer is how to achieve a good balance between building resilience and maintaining an open economy.

Third, while China’s economic development has certainly been one of the most impressive in history, that development has also come with a cost. Its environment is damaged, there are great inequalities and many imbalances have crept into the economy. Unaddressed, these structural weaknesses could destabilise the country even more than a hostile US. Thus, the next plan will make a more resolute effort to decisively reduce these weaknesses.

A key thrust will be to develop self-reliance. In recent months, the authorities have been highlighting Xi’s concept of a “dual circulation” strategy. In this approach, China will emphasise its domestic market, reducing its dependence on exports and leveraging much more its vast domestic market and its growing capacity in innovation., China will still ensure, however, that it has a profitable relationship in trade, investment, technology and other areas with the rest of the world, so this strategy is not a sign that the country is turning inward, reverting to its pre-reform autarkic economy. The 14th plan will flesh out what Xi means by “dual circulation”. While not all the details are known, the central government’s public pronouncements do give a sense of what this model of development might mean:

•    A recent document, for instance, laid out an ambitious plan for “strategic emerging industries”, which encompass 5G networks, biotech and vaccine development, advanced manufacturing (such as industrial robotics, semiconductors and advanced materials for aerospace use) and green technology and equipment. The share of the economy accruing to such “strategic industries” has already soared to 11.5% in 2019 from just 3.9% in 2014 — but the government clearly wants it to go even higher;

•    Raising R&D spending: As such spending has failed to reach the targeted 2.5% of gross domestic product by 2020 as planned, reaching only 2.19% in 2019, there will be a big push to step up R&D efforts; and

•    Policymakers have also signalled the need to spur “new consumer spending”: The National Development and Reform Commission announced that it would come up with “more targeted measures to spur consumption”, “promote new types of consumption” and “create a better consumption environment”. Put differently, it sees an opportunity to raise the level of consumer spending in IT-enabled areas such as online education, online medical services (telehealth) and e-commerce by developing the requisite hard infrastructure.

Another shift in strategy is to a stronger role for the state and a more subordinated one for the private sector. This will formalise a trend that Xi has been favouring for some time. Documents that have been publicised show the planning authorities calling on local governments and banks, for example, to support the high-priority industries through the provision of funds and credit. State-owned enterprises are envisaged to play a “leading role” in this new industrial policy. The authorities recently re-published a speech Xi delivered in 2015, where he emphasised that “Marxist political economy holds that ownership of the means of production is the core of production relations and determines the basic nature and direction of development of society”. In mid-September, the media gave considerable prominence to “important instructions” from Xi, who called for improving party control over private enterprise and entrepreneurs through United Front Work “to better focus the wisdom and strength of the private businesspeople on the goal and mission to realise the great rejuvenation of the Chinese nation”. The message is quite clear — the state will lead and, while it appreciates the dynamism and creativity of the private sector, the latter must know who is boss.

Yet another shift is to implement Xi’s bold pledge for China to become carbon neutral by 2060: At a speech via video link to the United Nations General Assembly, Xi announced that China would aim to have CO2 emissions peak by 2030 and attain carbon neutrality by 2060. Given the existing — and quite substantial — plans for building more coal-fired power plants, Xi seems to suggest a major change of direction towards engineering an energy transition in China towards renewables. One way of achieving this will be through the construction of “new infrastructure” such as ultra-high-voltage electricity grids, which are needed to support the shift away from conventionally produced electricity to that from renewables.

A fourth thrust of the plan will be to reduce inequalities that exist in several dimensions:

•    Rectify the imbalance between the urban and rural economies: The government announced that it would raise the share of local governments’ land sales revenues (one-third of total revenues) channelled to the rural areas to more than 50% by 2025 to help these localities “catch up” with urban cities. Premier Li Keqiang also called for government administration and public services in rural areas to be “streamlined” to encourage the return of innovative and entrepreneurial activity;

•    Improve regional disparities: For example, there will be huge infrastructure projects in the more backward central and western parts of the country; and

•    These efforts will not detract, however, from the strategy of creating several mega-clusters of cities. China’s planners believe that such urban agglomeration is the key to future growth, that there are still great synergies to be reaped when talent, capital and economic activities are concentrated in such clusters. The recent decision to combine Chengdu and Chongqing plus 14 other cities into a city cluster called Cheng-Yu was very much in this direction.

There are still many gaps in our understanding of what the plan will contain — for instance, how will it tackle income inequality among different classes of society? All this will become clearer by the end of this month.

Overall, the shape the 14th plan is taking is likely to produce a stronger and more resilient Chinese economy. There is, however, one big question — and that is whether China’s ambitious rebalancing can be completed without fundamental reforms of the underlying political economy.

For example, without a redistribution of income from state-owned enterprises and local government elites to households, can the Chinese economy really shift towards consumption and away from debt-fuelled investment? Recall that the major reason for its remarkably low share of household spending in GDP is that households’ share of gross national income is unusually low.

Moreover, the inefficiency of state enterprises compared with private enterprises and the proclivity of the former to engage in wasteful, debt-fuelled investment goes against the grain of an economy that is burdened by a declining and ageing workforce and thus needs higher total factor productivity growth to propel it forward. Yet, Xi’s heartfelt belief in strengthening the state over the private sector sits uneasily with this need.

A second concern we have is that China’s aggressive state-centred industrial policy could provoke a reaction from its rivals. The US will not simply stand still and watch China gain an ever-stronger leadership position in the world. The US, it seems to us, has reached a moment similar to its “Sputnik moment” 63 years ago when the Soviet Union stunned the US by successfully launching the world’s first-ever artificial satellite. That galvanised the US to radically step up its R&D and address its then weaknesses. In addition, we can expect the US to also step up efforts to contain China’s rise in coming years.

Whatever it is, it is clear that China is at a critical turning point. Its impending changes in economic strategy will have substantial effects on the global economy and on geopolitical developments for some time to come.

Manu Bhaskaran is CEO of Centennial Asia Advisors

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