What to Expect in China’s 14th Five Year Plan? Decoding the Fifth Plenum Communique

Policy priorities revealed at the Fifth Plenum offer insights on what industry and businesses can expect from China’s 14th Five Year Plan in March 2021.

The 19^th Central Committee of the Community Party of China held its Fifth Plenary Sessions in Beijing between October 26 to 29 to set the outline for the upcoming 14^th Five Year Plan (2021-2025) (14^th FYP).

Since 1953, China’s Five-Year-Plans have been the single most important guiding document signaling the policy direction for the country’s future economic and social development.

The plenum communique, was released immediately after the meeting, followed by the Party’s Recommendations to the Plan and President Xi Jinping’s 14th FYP Explanation shortly after – which elaborated on the details and reasoning for the policy path taken.

Overall, the plenum documents signaled no significant changes to the policy direction, but instead saw the progression of many nascent and familiar themes that have been boiling to the surface more recently, such as:

• Replacing high-speed growth with high-quality growth;
• Rebalancing its economy with supply-side structural reform;
• Expanding domestic demand, while continuing to support international export markets;
• Driving modernization through innovation and technological advancements; and
• Promoting high-end, intelligent, and green production.

While observers will have to wait until the National People’s Congress in March 2021 for the release of the full and final 14^th FYP, for now, these documents offer investors a window into how the party understands the most important challenges and opportunities facing China, and can guide businesses with their future planning and budgeting decisions. Here we break down the main takeaways and implications for investors.

The 2020 Fifth Plenum: Overview and context

The Central Committee of the Chinese Communist Party typically holds seven plenums during its five-year term. Of these, the Fifth Plenum is among the most critical, as it is when the party convenes to deliberate the development priorities of the next Five-Year-Plan – the country’s periodic policy blueprint.

While every FYP is significant and emblematic of its time, this year’s is particularly noteworthy due to a confluence of many factors:

• China’s impressive recovery during the pandemic is seen as a roadmap to advancing forward in the new normal;
• Scientific and technological revolution and industrial reform against the backdrop of swelling geopolitical tensions; and
• China’s rising profile in international affairs and its critical role in the global supply chain.

This year’s fifth plenum – the second such plenum presided over by President Xi Jinping – saw the release of two separate blueprints:

• 14^th FYP (2021-2025): Sets goals for the first five-year period during which China builds a well-off society in an all-round way; and
• 2035 vision (2021-2035): A mid-term vision to focus on ‘socialist modernization’.

The release of the 2035 vision (only the second 15-year plan of this type to ever be released) is heavily laden with political meaning. The projected national plan signposts the midway point of the centenary anniversary of the People’s Republic of China and is a key marker of Xi’s national rejuvenation project to build a modern socialist country that is prosperous strong, democratic, culturally advanced, and harmonious by 2049.

In the same vein, the 14^th FYP will cross over into 2021 (the centenary anniversary of the CCP) –the deadline for achieving the goal of building a moderately prosperous society in all respects, another significant milestone for the Party.

The 14^th FYP: Guiding ideology and goals

Economic development

In terms of economic goals, the party emphasized a switch from high-speed to high-quality development – stressing the medium-term goal of economic structure optimization for better quality and efficiency development.

As explained by Xi, this will be key to “preventing and dissolving the hidden risks and actively responding to the impact and challenges brought about by changes in the external environment.”

Policymakers made no reference to the previous goal of doubling the GDP over 2010-2020 (which would have required a 5.6 percent growth in 2020 to be fulfilled), though it did highlight the success of its GDP growth rate, which is estimated to exceed RMB 100 trillion (US$14.92 trillion) this year.

It is not yet clear whether a numerical growth target will be set for 2025, but if set – it is expected to be a much lower target of around five percent. However, so far, the party has stated that China’s GDP per capita is to be at the level of ‘moderately developed nations’ by 2035, with a per capita GDP of about US$30,000 – three times China’s current level in 2020.

New development pattern – growth driven by domestic demand

It is now clear that the dual circulation policy (DCS) – first proposed by Xi in May – will play a central role in the 14th FYP. In a nutshell, DCS is a two-pronged development strategy that involves mutual reinforcement of domestic and international markets to spur long-term, sustainable consumption patterns, and to hedge against external shocks within the global environment.

The communique indicates a series of forthcoming policies that will create a supply system that is more compatible and conducive to ‘expanding domestic demand.’

Some examples laid out include:

• Promoting a system of “managing the purchase behavior to managing the latter usage” for consumer goods such as automobiles; and
• Improving the modern circulation system by developing contactless transaction services, reducing corporate circulation costs, integrating online and offline consumption, and coordinating urban and rural consumer markets.

Further, emphasis is placed on balancing and coordinating the internal players in the domestic market (across industries and upstream and downstream of the supply chain).

The takeaway for investors here is that there is still a large space for investment growth; as attention shifts to the domestic economy, investing “in China, for China” may become a common refrain and indeed a necessary strategy for many businesses.

Innovation and technological self-reliance

In line with this, innovation was hailed as the central concept driving China’s modernization – with technological independence and self-reliance as strategic supporting pillars to this development model.

Not unlike the 13^th FYP and the release of Made in China 2025, the 14^th FYP will continue the transition from producing cheap-low-tech goods to be the high-end and specialized producer of goods, and encourages the transition to “tech self-sufficiency.”

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While previously we saw these types of policies being underplayed and implemented in a piecemeal way, especially after the US-China trade war, their implementation over the next five years will likely be ramped up and more consistently applied across the country.

Though not explicitly mentioned, chip-making will likely be the key focus in the next five years, as China seeks to build up its endogenous capacity.

Besides this, the plenum renewed emphasis on protecting intellectual property rights, talent attraction, tech infrastructure, and establishing mass interdisciplinary and cross-regional innovation centers – all of which are likely to be featured in the full text of the 14^th FYP.

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Investment in R&D was a resounding theme – with seven frontier fields highlighted for further exploration: artificial intelligence, quantum information, integrated circuits, life and health science, neural science, biological breeding, and aerospace technology.

The plenum documents also pledged more support for businesses and entrepreneurs.

Businesses will be given a bigger role to take the lead in innovation consortia and undertake major national science and technology projects.Entrepreneurs will be able to avail of open talent policy, training, and profit distributions that fully reflect the value of the innovation.

In short, businesses and entrepreneurs can expect continued support when working within these seven emerging areas, particularly where investments are made in R&D.

Business and market reforms

The commitments here were familiar, and include:

• Higher level opening up and improved market access;
• Fiscal, taxation, and financial reform;
• Improved fair competition, market supervision capabilities, law enforcement, and oversight; and
• Market-oriented reforms of land, labor, capital, technology, and data.

In terms of market-reforms, it seems that the 14^th FYP will see improvements made to the national treatment mechanism and negative list system for foreign investment, methodically expanding the opening-up of the service industry, safeguarding foreign companies’ legitimate interests, and optimizing the legal, policy, and service framework to encourage and protect outbound investment.

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Four competitive sectors will benefit from special market-oriented reforms – energy, railway, telecommunications, and public utilities industries.

In addition, efforts to expand and diversify the modern services industry will be accelerated – creating new opportunities in health, elderly care, childcare, culture, tourism, sports, housekeeping, property, and strengthening the supply of public welfare and basic service industries, etc.

Greater reform autonomy will be provided to free trade zones and Hainan Free Trade Port will be well-established.

Most of these commitments are by now familiar to us, but investors can expect the ramping up of existing policies, such as (more FTZ developments) and more transparency in China’s market access (for example, the release of the first cross-border services negative list).

Advanced manufacturing

Transformation in the industrial supply chain is recognized as necessary to bolster domestic demand and build endogenous innovation capacity.

Consistent with business trends in the post COVID-19 climate, the manufacturing industry will also see a push towards more high-end, intelligent, and green technology.

Policies will be implemented to accelerate:

• 5G, big data, and artificial intelligence integration in advanced manufacturing clusters within various industries;
• Improvements to the quality of national infrastructure, strengthening patent standards and other systems; and
• Digital development in industrialization.

Upgrading manufacturing was highlighted in the 13^th FYP as well, but now new policies for advanced manufacturing are expected to be codified in the 14^th FYP.

Urbanization

The persistent and growing inequality between rural and urban areas were acknowledged at the plenum.

Importantly, the 13^th FYP period saw major achievements in terms of urbanization and improvements to the quality of life for the common people including:

• More than 60 million new jobs have been created in urban areas;
• Average life expectancy of residents reached 77.3 years in 2019;
• Nine-year compulsory education rate reached eight percent, and gross enrollment of higher education exceeded 50 percent;
• Basic medical insurance reportedly covered more than 1.3 billion people; and
• 75 million rural people have been lifted out of poverty.

China has pledged to make further progress on all these fronts – with added emphasis on constructing wage structure improvements, strengthening employment policies, building a high-quality education system, improving the social security system, and poverty alleviation with a focus on addressing the imbalance in development and the wealth gap in China.

Healthcare

Of course, in the post-COVID-19 climate, no national policy plan can omit the issue of healthcare. It is likely the 14^th FYP will see a continuation of the Healthy China 2030 Vision that was introduced in 2016. As expected, the Party recommendation placed a heightened emphasis on public health and prevention and strengthening the early response system.

More specific objectives raised at the plenum include: to rebalance medical resources and accelerate construction of hierarchical diagnosis and tiered treatment system, strengthen the construction and management assessment of public hospitals, and promote the reform of centralized procurement and use of drugs. Telemedicine, elderly care services, and mental health were highlighted above other areas, and these segments are likely to see rapid development in the next five years.

Environment and climate change

Recognizing that the country’s ecological and environmental protection still has a long way to go, China is once again making climate change a central policy priority.

China is expected to implement a series of ambitious and aggressive plans for green and low-carbon development in order to reach peak carbon emissions by 2030 and become carbon neutral by 2060 – goals set out by President Xi Jinping at the United Nations General Assembly in September 2020.

The proposal provided a glimpse into the types of areas that will be supported, such as:

• Green finance, green technological innovation, clean production facilities;
• Environmental protection industries;
• Green transformation of key industries and important fields;
• Clean, low-carbon, safe and efficient use of energy;
• Green buildings; and
• Green life creation activities.

A fight for ecological and environmental protection will also be upheld on multiple fronts including the soil, air, and water. Further, China will also work towards allocating energy and resources more efficiently through methods such as implementing national water-saving actions, improving the resource price formation mechanism, and promoting waste classification.

However, there are still some concerns about how China plans to transition away from coal power, as it currently still dwarfs other countries in terms of both number of coal mines in operation and under construction.

Old policies, new priorities

The three documents released after the fifth plenum were comprehensive and signal the types of policies that can be expected come March 2021.

The plan’s overarching theme is “progress while maintaining stability” and relies on five key development concepts: innovation, coordination, greenness, openness, and sharing.

The 14th FYP as a result carries forward many of the same themes first introduced by the 13th FYP. The difference, however, is the shifting emphasis of these themes. For example, innovation and advanced manufacturing – though prominent in the 13^th FYP – have now been elevated to being top national priorities for the 14^th FYP.

Similarly, self-sufficiency and boosting domestic demand – which were emerging themes in the 13^th FYP have now become much more pronounced.

The full text of the 14^th FYP will be released in March 2021, with more details expected to be released progressively until then. Investors should stay abreast of these developments for purposes of budget planning and reorienting their China strategy for the next few years.

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