A new starting point and a more challenging environment have been driving China to adjust its economic growth pattern. The trade war the US launched against China more than two years ago and the Covid-19 pandemic have had significant negative impacts on the Chinese economy. Yet most of the objectives of the 13th Five-Year Plan (2016-2020) will likely be achieved by the end of this year except GDP growth and household income growth due to the pandemic shock.
China’s per capita GDP will likely reach $10,400 by the end of the year compared with $8,000 five years ago, which is significant because the number of people in the middle-income group already exceed 400 million. But despite the previous five-year plan witnessing significant progress in poverty reduction and supply side structural reforms, China now faces more challenges, especially on the external front.
Challenges from domestic and global economies
The Covid-19 pandemic has dragged the global economy into recession, squeezed macro policy room in most economies, and increased opposition to globalisation. Sino-US tensions have been escalating across the board, leading to stricter US tech restrictions on China, increasing “decoupling” pressure, and accelerated restructuring of supply chains.
Domestically, aging demographics, a lower savings rate, elevated macro leverage, technology bottlenecks, and low efficiency in some areas remain key headwinds for China’s long-term growth.
Given these facts, what can be expected from the new 14th Five-Year Plan (2021-2025)?
Compared with the 6.5 per cent above average annual growth target set in the 13th Five-Year Plan, we (at UBS Group) expect the Chinese government to either not set an explicit growth target or set a lower and more flexible (for example, about five per cent) growth target in the new five-year plan. And in spite of an expected sharp rebound in 2021, we see China’s growth averaging five per cent in the next five years.
The 14th Five-Year Plan is likely to put emphasis on fostering structural changes domestically and improve the quality of growth along the lines highlighted by the recent “dual circulation” development pattern put forward by the country’s leadership.
This means the 14th Five-Year Plan could set ambitious targets for the urbanisation rate (likely another five percentage point increase in urban hukou, or household registration), new urban employment growth (possibly another 50 million from 2021 to 2025), increase in shares of consumption and services, improvement in social safety net, and higher education and research and development spending. Also, the next five-year plan may continue emphasising environmental protection and risk controls on the financial and property sectors.
The new five-year plan is expected to follow the theme of “dual circulation”, which is centred on the domestic economy (or “internal circulation”) and aimed at integrating the domestic economy with the global economy (or “external circulation”) to develop new advantages for China in global competition, with new emphasis on fostering urbanisation (mainly in developing metropolitan areas and city clusters and easing hukou restrictions), continued infrastructure investment, measures to support employment in small and medium-sized enterprises and improve the social safety net, and hence, consumption.
It would also require further deepening of supply side structural reforms, in order to help reshape domestic supply of goods and services to meet domestic demand, as well as to improve productivity and sustainability. In particular, a higher hukou urbanisation rate target and further easing of hukou restrictions mean an increase of more than 80 million urban hukou holders in the 2021-2025 period.
As for the ongoing land reform, it could lead to more rural land entering the market directly and accelerated development of the land exchange market. And further State-owned enterprises reform may focus on more mixed-ownership reform, divesting of some State capital from competitive sectors, and increasing competition.
Besides, as a key part of the “dual circulation” strategy, we are convinced China will further open up its economy during the next five years. Indeed, China has further opened up to the outside world in recent years, including implementing a new Foreign Investment Law, further shortening the “negative list”, removing foreign ownership caps on financial institutions, abolishing quota restrictions of Qualified Foreign Institutional Investors and Renminbi-denominated Qualified Foreign Institutional Investors, and implementing stock and bond connect programmes, so as to level the playing field for foreign investors.
Looking ahead, we expect China to continue opening up the domestic markets for foreign investors in most sectors, further shorten the negative list, and lower the import tariffs and non-tariff barriers. These measures, along with China’s large and rapidly growing market, and decent yield spreads, should help attract more foreign direct investment and portfolio investment in the coming years.
More importantly, China will likely continue to be the leading engine of global consumption growth in the next five years with an expanding middle-income group, as its total consumption is expected to reach $12 trillion in 2025, almost $4 trillion more than the estimated 2020 figure.
Also, consumption upgrading will likely continue toward more services, better quality, more health-related spending, more experience and self-improvement, and more online shopping.
China is likely to target its R&D share in GDP from 2.5 per cent in 2020 ($350-400 billion) to about three per cent in 2025 ($600-650 billion), and further increase spending on education and vocational training.
In light of the decoupling pressure and from tech restrictions by the US, China may allocate more resources to fundamental research, frontier research and tech bottleneck areas (for instance, chips and semiconductors, software, precision machinery, fine chemicals, advanced robotics, new materials), better protect intellectual property rights, and offer more market incentives to researchers.
In addition, China’s significant talent pool (about eight million college graduates per year, of which about four million are majors in science, technology, engineering and mathematics), large market size and a relaxed regulatory environment should help underpin tech progress and accelerate the application of R&D outcome.
We expect the government to further support digitalisation and related implications in the next five-year plan. China’s online sales penetration may rise further from an already high ratio of 21 per cent in 2019 and 25 per cent year-to-date, while online provision of other services including remote working, education, healthcare and financial services will also grow rapidly.
The government is also likely to help facilitate Chinese corporations to transform their business model with more digital services by increasing the provision of “new infrastructure” (that is, data centres, 5G networks, artificial intelligence and internet of things).
And although the annual investment of officially defined “new infrastructure” is still small (about one trillion yuan or $148 billion), we expect related investment to grow more rapidly than the “old infrastructure” in the next five years.
Zhang Ning is a senior China economist, and Wang Tao is chief China economist and head of Asia Economics at UBS.
CHINA DAILY/ASIA NEWS NETWORK