Washington is about to develop China's next five-year plan

Washington is about to develop China's next five-year plan

For Chinese officials working on the country's 14th Five-Year Plan, the US is facing the drafting process.

A senior Chinese government official who advised on the manufacturing strategies of the five-year plan said, regardless of whether Donald Trump is re-elected on November 3rd or defeated by Joe Biden, "It is certain that US-China industrial decoupling will continue next becomes year ".

"China is still lagging behind advanced economies in mastering key technologies and we will not catch up for the foreseeable future," added the official. "We need to keep savings rates at a reasonable level so that we can continue to invest in research and development."

On Thursday evening, the Chinese Communist Party closed an important annual planning meeting with a communique setting out the main goals for the next five-year plan, which will run from 2021 to 2025, as well as the longer-term development goals up to 2035.

US sanctions against Chinese technology leaders were landmark events for China's leadership

The summary document from the Central Committee's annual plenary session did not reveal any specific growth or industry goals and instead focused on the party's broader ambitions as President Xi Jinping prepares for an unprecedented third term in 2022.

As widely expected, the plenary stressed the importance of "scientific and technological autonomy" and a "strong domestic market" to counter US efforts to hamper many of China's leading technology companies.

"US sanctions against Chinese technology leaders were groundbreaking events for China's leadership," said Andrew Batson of Gavekal Research. "The moves showed that the US had tremendous leverage over China due to the dominance of core semiconductor technologies, and that the US was ready to leverage that leverage for geopolitical goals."

Larry Hu, China's chief economist at Macquarie, said the party's five-year plans revealed "the greatest challenges facing China's leaders" and their solutions to those challenges. "Today the biggest challenge for Beijing is a possible decoupling with the US," he added.

In addition to the technological self-sufficiency in important areas such as semiconductors, the plenary also emphasized the importance of “double circulation”. Economic theory, first set out by Mr. Xi in May, emphasizes domestic demand and "indigenous innovation" versus interaction with the outside world.

"Only if we are technologically self-sufficient can we support high-quality development," said Han Wenxiu, a senior finance official for the party, at a press conference on Friday morning.

Qu Hongbin, China's chief economist at HSBC, said, "In the coming years there will be more policy efforts to increase R&D spending, particularly in strategic sectors such as biotechnology, semiconductors and new energy vehicles."

Mr. Qu added that the government's official R&D target could be raised to 3 percent of gross domestic product, compared to just 2.2 percent today.

This and other specific goals are likely to emerge if the plan is finalized before it is formally adopted at next year's annual session of the Chinese Parliament, usually held in March.

However, it is not clear whether the plan will include an average annual growth target for the five-year period or specific benchmarks to measure China's progress towards becoming “self-sufficient” in key technology sectors like semiconductors.

Formal growth targets were criticized for often encouraging lavish, debt-driven investment when Mr. Xi's government declared it wanted to highlight "high quality" green growth.

The Chinese government has set an average annual growth target of 6.5 percent for its most recent five-year plan to double the size of its economy between 2010 and 2020, but will not meet that target due to the Covid-19 pandemic.

Beijing is also concerned about setting specific industrial targets after a previous “Made in China 2025” development plan set the Trump administration on fire. Washington targeted many of the sectors identified in the plan with punitive tariffs during a two-year trade war.

"[China's] five-year plan is more of a guide than an actual plan of action," said Hu of Macquarie. "Most goals are forward-looking rather than binding."

Some officials and analysts fear that five-year plans can inadvertently hamper the development of businesses, without which many of the plans' goals cannot be achieved.

"More tax cuts and lower barriers to entry for private sector companies will be key to increasing overall investment," said HSBC's Qu.

The official involved in drafting China's next five-year plan warned that "many government-sponsored funds have invested heavily in high-tech projects that are really nothing more than a mix of commercial and industrial real estate and obsolete factories."

"We need to realize that new [technologies] don't like roads and bridges that can be built with a lot of money," added the official.

“Your main investment trait is uncertain returns and many government funded projects have nowhere to go. . . We have to let market forces decide how much and where to invest. "