To understand the outcome of the Communist Party of China’s 5th plenum that concluded last week, it would be useful to look at a speech that President Xi Jinping made in April, but which was revealed only on Sunday in the top CPC theoretical journal Quishi.
Reporting the speech, the Global Times said that the Chinese leadership is signaling a strategy which would focus on boosting domestic supply chains and home-grown innovation to “become completely self-reliant in economy and core technologies.” This move, the report said was in the context of the mounting “external risks.” These “external risks” have been painfully apparent to the Chinese in recent years as Chinese companies like Huawei, Bytedance and Tencent are getting shut out of foreign markets under US pressure, with even friendly Europe reassessing its Chinese options.
In the speech, Xi spoke of the strategy (accessed using Google translate) which has subsequently been mooted as the “dual circulation system” wherein the economy relies primarily on domestic production, supply chains and markets, and only secondarily on world trade. Xi also called for excelling in core technologies like high-speed rail, electric power equipment, new energy, telecom equipment, etc. in the medium to long-term. In the interests of “industrial and national security” there was need, he said, to be “autonomous, controllable, safe and reliable” domestic production and supply chains. Xi went on to extol the size of the Chinese middle class and touted it as the world’s largest consumer market. He said that the emphasis on making consumption the engine of growth would also lead to expanding the scale of the middle class, enhance the urban experience.
The 5th plenum was called to discuss what is officially called the “14th Five Year Plan (2021-25) for National Economic and Social Development and the Long-Range objectives through the year 2035” which is under preparation currently and is expected to be approved in the annual session of China’s Parliament, the National People’s Congress (NPC) next spring. The four-day meeting held in Beijing was chaired by Xi and attended by over 350 top officials and it stressed providing the economy with an inward-looking approach.
The communique of the plenum (accessed using Google translate) did not spring any surprises. It was predictably focused on boosting China’s technological capabilities and self-reliance, as well as security and military modernisation. In addition, the document spoke of “dual circulation.”
There are 12 focus areas listed for the plan. These are, a scientific technical self-reliance and innovation, a modern industrial system, a strong domestic market, reform, prioritising agriculture, regional development and urbanisation, cultural or “soft” power, green development, foreign relations, the quality of life of citizens, integrating civilian and military sectors of the economy and military modernisation.
Looking beyond to 2035, the plenum set the goals for achieving what they say is “socialist modernisation.” These are to significantly increase the country’s economic and technological strength and enhance the per capita income of both rural and urban residents. By that date, China expects to finish building a modernised economy which will be based on new industrialisation, IT application, and agricultural modernisation. Likewise, the modernisation of the military would have been achieved. By this time the per capita GDP will be the level of moderately developed countries and disparities between rural and urban, as well as regions will be reduced. As the Wall Street Journal points out, becoming a “moderately developed country” by 2035 would mean a per capita GDP of around US$ 30,000 per year, as against the current US$ 10,262, something that is equal to South Korea’s current level.
The emerging plan has no indications that the Chinese intend to set any formal growth target. Whether they will have other benchmarks to measure the annual performance during the plan period remains to be seen. The 13th Five Year Plan target was to have a 6.5 percent rate of growth per annum and a doubling of the economy between 2010 and 2020. Covid-19 has ensured that China will fall a little short of target, most of which have been met. However in Xi’s explanatory remarks made public on Tuesday, he said that it was possible for China to meet the current standards for high income countries and to double the size of the economy or per capita income by 2035. This would require an annual GDP growth rate of around 5 percent, so we could have an implicit, rather than explicit target. Even so, the focus is clearly on technological innovation, upgrading of industries and supply chains and developing the domestic markets to drive growth.
The big downside to Chinese plans is its growing rift with the US. Financial Times cited a senior Chinese government official advising on the five-year plan’s manufacturing strategies who said that regardless of whether Donald Trump is re-elected on 3 November or defeated by Joe Biden, “it is certain that industrial decoupling between the US and China will continue into the next year.”
However, at the public level, Chinese officials are playing down the notion of decoupling. Speaking at press briefing after the plenum, Han Wenxiu, a senior party official dealing with finance said that decoupling was not realistic and would hurt both the US and Chinese economies. He underscored the importance of dual circulation where domestic and international markets would complement each other, with the former being the anchor.
At the same press conference, Wang Zhigang, China’s Minister for Science and Technology said that technological self-sufficiency was a strategic necessity for the country. “We must boost independent innovation, because key technologies can’t be bought or asked for.”
Observers are expecting a sharp rise in China’s R&D funding, especially for biotechnology new energy vehicles and semi-conductors. Expectations are that the R&D spend could be increased to 3 percent of GDP as against 2.2 percent currently. Even so, there is a huge gap in China’s ambitions and its current situation. This is most stark in the case of semi-conductors where China purchased US$ 300 billion worth of chips last year. According to one estimate, in 2019, less than 16 percent of the chips China needed were produced there. So much then, for self-reliance which is, at the best of times, a dubious slogan.
In essence, what the Chinese seem to be doing is to be putting on a brave face in dealing with what are actually self-inflicted wounds of alienating all the major countries of the world. The emphasis on self-reliance, innovation and the whole business of “dual circulation” seems to be aimed at convincing the country that the process of decoupling currently underway could somehow be made to work in China’s favour.
On the other hand, China is the only major economy whose economy expanded this year, with all others being driven to negative growth because of the pandemic. This will certainly help Beijing to stave off the pressure of decoupling for a couple of years. In addition, by undertaking reforms such as opening up its finance sector, China could provide a further incentive for western banks and financial institutions to continue doing business. China’s strategy is to use special zones in Shenzhen and Hainan to become global hubs of technology, finance and industry. Both regions have been encouraged to experiment with policy to encourage more foreign investment. Shenzhen was the region which triggered the first spurt of Chinese growth. Now, Xi and his associates are hoping that the larger Guangdong-Macao-Hong Kong region will rise up to meet the new challenge.
Manoj Joshi is a Distinguished Fellow at the Observer Research Foundation (ORF). Views are personal.
The article first published by the ORF.