Under US pressure, China is planning an economy that can survive a protracted war

The prospect of all-round confrontation with America has invoked a Mao-era fighting spirit that is the driving force behind China’s 14th five-year plan
Beijing’s vision of a ‘dual circulation’ economy is likely to emphasise technological self-reliance and growth targets based on quality, not quantity

Wang Xiangwei

Published: 9:30am, 15 Aug, 2020

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As the world’s second-largest economy, China has come a long way since it jettisoned the Soviet-style command economy and embraced reforms and opening up in the 1980s.

But the five-year plan is one of the few potent remnants of that bygone era that Chinese leaders are determined to carry forward and expand. They have long argued that such forward thinking and planning have helped the country to become an economic powerhouse by combining capitalism and state controls.

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With officials drawing up the 14th five-year plan, which will run from 2021 to 2025, it has taken on a special importance.

The United States may not be mentioned but the prospects of rising all-round confrontation between the two countries have become a powerful driving force behind the formulation of the new plan.

Because of this, there have been rising concerns and confusion over whether the Chinese government will strengthen state controls over the economy at the expense of reforms and opening up in the next five years as President Xi Jinping has now urged the country to prepare for “a protracted war” in anticipation of a more hostile international environment in the post-pandemic world.

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China introduced its first five-year plan in 1953, directly replicating the Soviet model and imposing rigid production quotas for all industrial and agricultural products. However, since the 1980s when Deng Xiaoping promoted reforms and opening up, the planning exercise has gradually evolved to become a hybrid of mandatory targets and indicative guidelines and expanded to include not only economic but also social and environmental development goals.

For instance, the current 13th plan includes the government’s ambitious target of eliminating absolute poverty by the end of this year. It is confident of achieving this despite the coronavirus pandemic and its impact on the economy.

Another example is that 10 out of 25 priority targets relate to the environment and must be achieved by the end of this year.

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There has long been debate over the pros and cons of the five-year plans. Chinese leaders have argued that such plans have enabled the government to pool national resources to work on major projects. For instance, in the first five-year plan from 1953 to 1957, China planned 694 major industrial projects, including 156 aided by the Soviet Union with technology and manpower, ranging from steel to cement to chemicals. This laid the foundation for the country’s industrialisation.

But others have questioned the efficacy of the plans as the private sector and foreign businesses have become major drivers of the economy and employment.

A production line at an automobile technology company in Hebei province, China. Photo: Xinhua

Putting together a five-year plan is a mammoth project involving tens of thousands of officials and government researchers over a period of more than two years.

The preparations for the upcoming 14th plan began in late 2018 when officials from the National Development and Reform Commission, the powerful planning agency, began a midterm review of the current five-year plan while launching preliminary research for the next one.

The major guidelines for the new plan will be set by a plenary session of the Communist Party’s Central Committee scheduled for October. Following that meeting, the new plan will be fleshed out in the run-up to the annual plenary session of the National People’s Congress in March next year, which will approve and release the plan for implementation.

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Just as the Chinese officials began the preliminary research for the new plan in 2018, US President Donald Trump launched the trade war against China, citing unfair trade practices and theft of intellectual property.

Since then, Xi has frequently mentioned that China needs to prepare for a new global situation where “unprecedented changes are taking place which have not been seen in the past 100 years”.

With China-US relations in a deep downward spiral and the coronavirus pandemic still ravaging much of the world, Chinese leaders have called on the public to have a mentality of “fighting a protracted war”.

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The phrase “protracted war” has special connotations in China, tracing its origin to the early years of the country’s anti-Japanese war when Mao Zedong wrote a series of speeches in 1938 titled “On Protracted War”. Among other things, Mao warned about years of difficult times ahead fighting the much more powerful Japanese invaders. Japan surrendered in 1945, seven years after Mao’s work.

With that phrase back in vogue, the Chinese leaders have signalled that the hostile international environment facing China is likely to continue long after the pandemic is subdued and no matter who sits in the White House after the US presidential election in November.

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It is in this context that the Chinese leadership has decided to push for an economic pivot by reducing its reliance on global trade and focusing on rebuilding supply chains and boosting the domestic economy for sustainable growth. The new national development strategy, known as “dual circulation theory”, was first put forward by the leadership in May. It envisions a new economic pattern to be dominated by domestic economic circulation and facilitated by circulation between China and the rest of the world. The dual circulation strategy is expected to be fully fleshed out in the new five-year plan.

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While the plan is still being debated and drafted, several threads have become apparent.

One is that China is expected to set a lower economic growth target of 6 per cent or even less, compared to the average growth rate of 6.5 per cent in the current five-year plan. In fact, there have been debates on whether an annual growth rate is still needed as the country tries to pursue quality growth.

Secondly, boosting innovation capacity and breakthroughs in core technologies to promote technological self-reliance will be one of the key features in the new plan. Due to US pressure, China has erased all mention of its flagship industrial policy Made in China, released in 2015, which aimed at moving the country up the value chain to become a high-end producer of goods, seeking dominance in 10 strategic industries from electric cars and next-generation telecommunications to advanced robotics and artificial intelligence. Now, given Washington’s intensifying restrictions on China’s hi-tech companies, the new five-year plan will be more likely to continue with the objectives of the policy.

That probably means the government will need to greatly boost research-and-development spending, which accounted for 2.19 per cent of China’s gross domestic product in 2019, lower than the 2.5 per cent target listed in the current five-year plan. In fact, China also fell short of meeting its research-and-development spending target in the previous five-year plan (2011 to 2015). ■

Wang Xiangwei is the former editor-in-chief of the South China Morning Post. He is now based in Beijing as editorial adviser to the paper