For Chinese officials working on the country’s 14th five-year plan, the US looms large over the drafting process.
One senior Chinese government official advising on the five-year plan’s manufacturing strategies said that regardless of whether Donald Trump is re-elected on November 3 or defeated by Joe Biden, “it is certain that industrial decoupling between the US and China will continue into next year”.
“China is still lagging behind advanced economies in the mastery of key technologies and we are not going to catch up in the foreseeable future,” the official added. “We need to keep savings rates at a reasonable level so we can keep investing in R&D.”
On Thursday evening the Chinese Communist party concluded an important annual planning meeting with a communique that outlined its main goals for the next five-year plan, which will run from 2021 to 2025, as well as longer term development aims through 2035.
The summary document from the central committee’s annual plenum did not reveal specific growth or industrial targets, focusing instead on the party’s broader ambitions as President Xi Jinping prepares for an unprecedented third term in 2022.
As widely expected, the plenum emphasised the importance of “scientific and technological self-reliance” and a “strong domestic market” to counter efforts by the US to hamstring many of China’s leading technology companies.
“US sanctions on Chinese technology leaders were game-changing events for China’s leadership,” said Andrew Batson at Gavekal Research. “The moves showed that the US had enormous leverage over China due to its dominance of core semiconductor technologies, and that the US was willing to deploy that leverage for geopolitical goals.”
Larry Hu, chief China economist at Macquarie, said the party’s five-year plans revealed “the biggest challenges perceived by China’s top leaders” and their solutions for these challenges. “Today the biggest challenge for Beijing is a potential decoupling with the US,” he added.
In addition to technological self-sufficiency in vital sectors such as semiconductors, the plenum also harped on the importance of “dual circulation”. The economic theory, first expounded by Mr Xi in May, emphasises domestic demand and “indigenous innovation” over interaction with the outside world.
“Only by being technologically self-sufficient can we support high-quality development,” Han Wenxiu, a senior party finance official, said at a press briefing on Friday morning.
Qu Hongbin, chief China economist at HSBC, said “there will be more of a policy push for higher R&D spending in the coming years, especially 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 per cent of gross domestic product compared with just 2.2 per cent at present.
This and other specific targets will probably emerge as the plan is finalised ahead of its formal passage at next year’s annual session of China’s parliament, which usually meets in March.
It is not clear, however, if the plan will contain an average annual growth target for the five-year period or specific benchmarks to measure China’s progress towards “self-sufficiency” in crucial technology sectors such as semiconductors.
Formal growth targets have been criticised for stoking often wasteful, debt-fuelled investments at a time when Mr Xi’s administration said it wanted to emphasise environmentally friendly “high-quality” growth.
The Chinese government set an average annual growth target of 6.5 per cent for its last five-year plan in a bid to double the size of its economy between 2010 and 2020, but will fall short of that goal because of the Covid-19 pandemic.
Beijing is also wary about setting specific industrial targets after an earlier “Made in China 2025” development plan drew fire from the Trump administration. 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 guidance than an actual action plan,” said Mr Hu at Macquarie. “Most targets are anticipatory instead of binding.”
Some officials and analysts worry that five-year plans can inadvertently hinder the development of businesses, without which many of the plans’ goals cannot be realised.
“More tax cuts and lower barriers to entry for private sector companies will be key to boosting overall investment,” said Mr Qu at HSBC.
The official involved in drafting China’s next five-year plan warned that “many government-backed funds have invested heavily in high-tech projects that in reality are nothing more than a mixture of commercial and industrial real estate and outdated factories”.
“We need to realise that new [technologies] aren’t like roads and bridges that can be completed with a lot of funding,” the official added.
“Their main investment feature is uncertain returns and a lot of government-funded projects may end up going nowhere . . . We need to let market forces decide how much and where to invest.”