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Andrei Shvarev

Final-year student pursuing a degree in Asian and African Studies in the Higher School of Economics, affiliate student in the University College London

The structure of the Chinese economy is very complex and requires a high degree of planning in both micro- and macroeconomic areas. Since 1953, this system of planning has been performed by creating so-called ‘five-year plans’. The idea of implementing five-year plans came from the apparent need to develop heavy industries. […] Undoubtedly, the five- year plans turned out to be a useful and meaningful document for both: governors and public (including domestic businesses, foreign investors, and intellectuals). The strategy allowed them to make expectations of how China’s economy is supposed to look like in 5 years and make a relatively good analysis of where the structural approach was a good asset and vise versa. After the economic reforms of Deng Xiaoping, the government pursued the idea of planning, making a unique system where planning co-exists with a market economy. […] The value of the plans has moved from purely economic to the sphere of public affairs, which can be seen if we compare the percentage of economic components before and after the market reforms. […] Therefore, to analyze the success of either the current five-year plan or the ones to be implemented in the near future, we should focus more on the policy aspects. This paper will look at the accomplishment of the 13th plan, argue that the 14th plan will depend significantly on the achievements of the previous one and speculate on what critical aspects of the 14th we can expect to be successful and bring the changes it declares in the state of current economic recession.

During the 19th National Congress, it was stressed that the period of 13th and 14th would be crucial for the country’s development and change the driving powers of the economy. The Eastern provinces were expected to start turning those powers first due to their higher level of development, readiness for transformation, and economic dependence not on the production of resources, but on trade and technology. The other provinces were expected to follow the example and reduce disparities. The process would be accompanied by the central government's help in building specialized development strategies and initiating fiscal transfer payments (The State Council of the PRC, 2017).

The impact of the COVID pandemic is an inevitable increase in attention to the medical industry innovation and insurance sector reform. In post-SARS months in 2003, the sales of health insurance grew up to 300%, now a similar effect is expected, which will support the industry even more. (Ipsos, 2020). Both innovation and insurance are the parts of the 13th and 14th plans, and the current crisis is not expected to interfere with their accomplishment but can further stimulate it. The medical system that required innovation for a long time is becoming strategically important. Results that were to be achieved from 2021 to 2025 are being produced now. […]

Except for the two five-year plans' failure: second and third, the other ten has been completed or exceeded. The pragmatic approach of the government and proper pre-planning research allows us to be optimistic about the implementation of the fourteenth five-year plan's tasks. The country has been reducing its economic dependence on physical capital that began with Deng Xiaoping reforms and moving to other kinds, mainly social, human, and natural (Neuweg & Stern, 2019, p.2). Both 13th and 14th five-year plans are about transitions: transition to the ‘western style’ consumption-driven and sustainable economy. With scientific and technological innovations connected directly to the country’s growth, China is about to create a high-quality economy. Moreover, the greener goes its development, the more attractive investments become to the international community and developed partners. […] At the moment, we can make an optimistic forecast about the future fulfillment of a large part of the 14 five-year plan.


The structure of the Chinese economy is very complex and requires a high degree of planning in both micro- and macroeconomic areas. Since 1953, this system of planning has been performed by creating so-called ‘five-year plans’. The idea of implementing five-year plans came from the apparent need to develop heavy industries. It was a similar way to the Soviet Union's one, except that the Chinese economy became far more decentralized with time. Undoubtedly, the five- year plans turned out to be a useful and meaningful document for both: governors and public (including domestic businesses, foreign investors, and intellectuals). The strategy allowed them to make expectations of how China’s economy is supposed to look like in 5 years and make a relatively good analysis of where the structural approach was a good asset and vise versa. After the economic reforms of Deng Xiaoping, the government pursued the idea of planning, making a unique system where planning co-exists with a market economy. However, in recent years we can observe a trend of these plans becoming more of a general description of future policies, occupying the area of public policy and macroeconomic coordination, they start resembling the white papers in this sense. The value of the plans has moved from purely economic to the sphere of public affairs, which can be seen if we compare the percentage of economic components before and after the market reforms. For example, in 1981, economic indicators accounted for more than 60 percent, whereas in 2012, they decreased significantly to 12,5 percent (Hu, 2013, p. 631). A significant change happened in the 11th plan, which did not address quantitative growth, but focused on social, economic, and environmental issues altogether. The expectations for the GDP growth have also been in constant decline since then ((Bertoldi, Melander & Weiss, 2016, p. 5). Therefore, to analyze the success of either the current five-year plan or the ones to be implemented in the near future, we should focus more on the policy aspects. This paper will look at the accomplishment of the 13th plan, argue that the 14th plan will depend significantly on the achievements of the previous one and speculate on what critical aspects of the 14th we can expect to be successful and bring the changes it declares in the state of current economic recession.

Overview of the plans

During the 19th National Congress, it was stressed that the period of 13th and 14th would be crucial for the country’s development and change the driving powers of the economy. The Eastern provinces were expected to start turning those powers first due to their higher level of development, readiness for transformation, and economic dependence not on the production of resources, but on trade and technology. The other provinces were expected to follow the example and reduce disparities. The process would be accompanied by the central government's help in building specialized development strategies and initiating fiscal transfer payments (The State Council of the PRC, 2017).

Concerning the planning strategies, the 13th five-year plan released in 2016 was initially aimed at the transition to a more service-driven consumption economic model. The Chinese policymakers have prepared very well for the economic slowdown setting the targets of annual growth lower than they were for two decades before. It addresses five main areas of development: innovation, coordinated development, green growth, openness, and inclusive growth, and includes several new and fundamentally essential features.

By the end of 2020, the final year of the 13th five-year plan, a new 14th plan of five-year socio-economic development is to be released. It will be pre-approved at the V Plenary Session of the Central Committee of the Communist Party of China in 2020. It will further be accepted at the session of the National People's Congress (the highest body of state and legislative power of the PRC) in March 2021. Despite the current uncertainties, the plan is still yet to be released. Expectations and official statements explain what exactly it is going to include and what are its main areas of focus. The new plan is expected to focus on the creation of a high-income economy while prioritizing four spheres: digitalization, market accessibility, environmental improvement, and rural development.

Economic growth and finances

In the last four years, the Chinese economy showed a stable and consistent economic growth following the numerical goals of the 13th five-year plan and keeping the annual GDP increase above 6 percent. The envisaged result of the inevitable economic decline to a 1-2% GDP growth in 2020 due to the COVID-19 and worldwide financial crisis is that China will be stopped from achieving its quantitative economic goal (roughly 6% needed this year as well). The government has already refused to determine a numerical growth target due to the current market uncertainty [1]. However, this move might be perceived as optimal as it relieves pressure from local officials, allowing them to effectively deal with the consequences of the epidemic without fear of losing the required percentage and gives freedom to market forces that probably work better in the current conditions.

Studies and forecasts of the previous years [2, 3] Expected China’s GDP to continue its gradual slowdown and decrease to 5.5 – 5.9 percent annual growth with provincial GDP outreaching the national one and therefore bridging the economic gap between the eastern and western provinces (Li et al, 2019, pp. 167-168). The same numbers presumably were to be included in the 14th plan. The current worldwide economic decline might however, question the positions of the country. Depending on whether the country’s economic activity, which depends profoundly on the world economy, will fully recover by the end of 2020, the plan will be adjusted to the situation. So far, we might hear different opinions on the possible outcomes for China’s economy as the situation remains unpredictable. The country might benefit from the virus situation in the long run since all of the other major players are still under lockdown, and it may seem like a perfect time to increase economic activity. Moreover, low oil prices, supposedly remaining so at least until the end of the year, are favorable for China and can help economic recovery without significant financial losses. At the same time, the influence of the existing international market and global supply chain limitations is unavoidable. Its results can force the country to focus more on the domestic market. It may also turn out to be a relatively good trend and allow China to move faster to a modern digitalized consumption economy, which should have been built anyway following the 14th plan. Meidan (2020) notes that the slowdown is much more drastic for the Chinese economy comparing to the one of 2003, since accompanied by structural problems, increasing lousy debt and implications of the trade war with the U.S. (Meidan, 2020). So far, the government’s response to the current crisis can be considered successful: the country kept the demand at a high level and prevented a rapid increase in unemployment (as, for example, in the USA). Therefore, the situation will be considered in terms of optimistic forecasts for a quick recovery by the beginning of 2021.

The government aims to continue increasing the role of the market, however, looking for a balance through the preservation of big SOEs (state-owned enterprises) in some key areas. Complete abandonment of the SOEs is very unlikely in the near future as this would be a vast, disadvantageous for the party, political trade-off. Moreover, as a critical component of the OBOR initiative, the SOEs become even more critical for the Chinese government. Meaning we also cannot expect a significant restructuring, liberalization, or removal of subsidies for the SOEs or so-called ‘national champions’ so they can act solely on the market laws (Koleski, 2017, pp. 13-14). After implementing a mixed ownership strategy and allowing private companies to possess the SOEs partially, the government remained a controlling shareholder with government members resuming at full control. The markets themselves are often considered as merely an auxiliary tool for the government, which can be aimed at economy optimization and market components for big state companies accordingly.

At the same time, some analysts argue that China will also be increasing the share of private capital in foreign investment projects such as the aforementioned OBOR. Private companies are often the most significant source of innovative ideas and would be necessary for internal and external sustainable growth (Neuweg & Stern, 2019, p.8). The private sector has also proved to be more efficient, contributing significantly to unemployment eradication and GDP growth. The creation of the private sector itself and permission to let it grow resulted in one of the most significant reforms in China’s history. By promoting the non-state sector, the government showed its intentions to modernize the economy. Since 2018, credit allocations to the private sector, and its access to the capital markets have been increasing accordingly. Moreover, the banking system receives more from non-subsidized private loans with higher interest rates. The newly issued guideline (2019) provides a “fairer” environment for individual companies by further opening up the markets. It even allows the companies to enter some of the above-mentioned critical sectors, including electricity, railway, energy, internal oil, and gas fields development and infrastructure transportation projects (Central Committee of the Communist Party of China, 2019). We can expect the sector to follow this tendency and stick to the market mechanisms with some minor exceptions, principally, the spheres of government or national strategic interest such as import dependency on fossil fuels that would surely be increasing in the free market flow (Meidan, 2020, p. 11). Such dependence goes against plans to diversify the economy, sustainable development, and the green sector.

Improvements in the use of financial resources such as avoiding waste of investments and investment duplication are also expected to be a crucial point of the 14th plan (Academy of Social Sciences, 2019). Since 2016, the government has been rethinking its subsidies policy, switching from commitment-based subsidies to a more performance- & innovation-based ones. Meidan (2020) gives an example of plug-in electric vehicle producers receiving schemes and loans based on their batteries' capacity and energy efficiency (Meidan, 2020, pp. 9-10). The policy being one of the most essential components in the "sustainable" agenda of the future plan. The expected result is a reduction in the share of inefficient players in the market and a significant step towards the implementation of policies and international obligations to reduce emissions and increase energy efficiency.

A fiscal stimulus such as tax rate reduction can support GDP growth, but paying the price of an increased budget deficit. Moreover, there is substantial corporate debt accounting for more than 150% of the country’s GDP at the moment (OECD, 2019, pp. 105-106). This problem should come first and perhaps will not allow the government to increase the budget deficit and start more fiscal incentives just to maintain GDP figures. At the same time, GDP growth expectations are becoming less imperative and are subject to change, depending on local and international circumstances. The government may temporarily sacrifice the growth target to carry out critical systemic reforms such as building a healthy capital market. Long-term persistent institutional support for “high-quality development” means that the dominance of service-driven economic development is at the core of the next five years and will presumably put China in a row with highly developed sustainable economies of the West.

Environment and energy supply

The emphasis of the 13th plan on environmental development was truly unprecedented. It included the rational use of energy, defined pollution as a national problem, and pledged to implement the Paris agreements. The main task in China’s energy policy in the 13th Five-Year Plan was to improve supply and demand balance. It presumed the transition from minerals to renewable energy resources, as well as from coal to natural gas. The measures indicated in the 13th five-year plan related primarily to the electric power industry and the tasks of ensuring sustainable energy supply to the country's economy and population. This approach made it the ‘greenest’ plan so far. (The 13th Five-Year Plan for Energy Development, 2016). Some alternative energy sources and emission reductions goals have been partially achieved by 2018. For example, carbon intensity has fallen by more than 45% according to the 2020 goal, while the use of non-fossil energy has almost hit its 15% goal. However, after an impressive performance, some problems regarding the reduction in coal consumption have been faced. After a dramatic decline in the subsequent years of 2016-2018, 2019 ended up with an increase of 5%. The fall has been a consequence of government support of the coal industry, which helps the country deal with unemployment and to be prepared for possible gas shortages (similar to those that happened during the winter of 2017-2018) (Meidan, 2020, p. 7). Moreover, early achieved goals freed up local officials and allowed some of them to forget this side of the issue. Chinese intellectuals accept that the environmental situation is still serious, and minimal trend for improvement has taken place so far. According to Zhanheng (2019), ecological reform enters a critical period. The 14th plan will aim to increase environmental protection and recovery after a period of rapid growth and subsequent deterioration. The party line since the 18th Congress was defined by a long-term, extensive development in the spheres of environmental pollution, soil erosion, grassland degradation, desert expansion, water pollution. The solution is envisaged to remain so with new concepts of ecological development being put forward in 2021 (Zhanheng, 2019, p. 11). The State Information Center has prepared a CMRCGE (China Multi-regional Computable General Equilibrium) model, which projects the development of China’s energy demand, and carbon emission during the next few years and suggests possible implications for the 14th plan. Based on it, we can expect a continuous slowdown in the country’s energy consumption, more state investments into green and sustainable production, and a further decrease in carbon intensity (5.4% per year expected). The model also suggests a steady increase in the use of renewable energy resources is to be included in the plan (Li et al, 2019, pp. 171-172). These initial goals seem reasonable and without doubts would be achieved without severely influencing economic development in normal conditions. However, the projected economic recession might persuade Chinese officials to postpone environmental development until better times not to cause more harm to the economy. Moreover, as has been highlighted earlier, current fossils prices, particularly oil, are extremely suitable for the country’s economic recovery. Thus, it can be difficult to abandon them in favor of the more expensive alternatives.

Even though China’s environmental obligations and some other actions (like its leading position in the clean energy production) have impressed the public and proved some skeptical opinions to be wrong, they are still not sufficient to claim the country’s leading role in dealing with climate change. The 14th plan will be decisive in many ways and will find even more support for its sustainability in the international community. The government will continue balancing between economy and environment, and if the first goes according to the plan, we can expect the second to be taken care of. China has already proved itself capable of achieving environmental goals and probably aims at becoming a domestic and international leader in the sphere, impressing many observers, but still has a long way to go.

The notion of ecological development and provision of good livelihood solutions in China are supported internationally, and the performance-based subsidies increase the possibility of successful development. It is clear that at the moment, some areas are prioritized to a higher degree. Still, as long as economic development goes at least approximately according to the plan, the government should be willing to show progress in environmental actions.

International cooperation and development

The openness of the international arena for Chinese companies and investments, with a separate chapter dedicated to the ‘One Belt, One Road’ initiative in the 13th plan, is attracting more attention and its importance for the global economy is growing (Koleski, 2017, pp. 16-17; 23). Sustainable development will likely be included in this part of the 14th plan. The PRC is becoming the most significant trade partner and investor for the countries where GDP and income per capita are several times lower. As noted by Neuweg & Stern (2019), large-scale investments will inevitably lead to some improvements in these indicators and following economic growth. These countries mustn't build their economic growth on increasing the use of fossil fuels like China did two decades ago. Chinese investors should be selective in investment projects and support those ecologically friendly and built with renewable energy sources (Neuweg & Stern, 2019, p.8). This policy might be a hard way, but if implemented, it can turn out to be well rewarding in terms of the attractiveness of Chinese investments and environmental conditions. Chinese policymakers are surely capable of performing a switch in foreign investments and providing high-quality growth, both domestically and internationally.

2019 has brought some new external challenges to China’s economic development, mainly connected with the escalating tensions with the United States. Among the challenges, two, in particular, need to be highlighted: ongoing trade war and U.S. sanctions on some Chinese companies as a part of the sanction strategy against Venezuela and Iran crude oil industry. The situation has partially resulted in a decrease in the country’s GDP by approximately 0.5% (from 6.6 to 6.1), an increased focus on domestic renewable energy, as discussed above. In many ways, the continued influence of these factors on China’s foreign economic relations will be determined by the outcome of U.S. elections in late 2020 (Meidan, 2020, pp. 1-4). Considering the current anti-China rhetoric in the US, Trump is likely to pursue protectionist and sanctions policies, including against Chinese companies, in case of his re-election. Joe Biden would be more preferable to China in this sense as he has been continuously criticizing the trade war [4]. The absence of trade barriers in the form of high taxes and sanctions have the potential to help Chinese companies actively build up their positions in the global market and significantly increase the likelihood of materialization of the 14th plan’s international agenda.

European Union, in its turn, is also concerned about some of China’s current projects. Policy recommendations issued by the Commission in March 2019 express strong concern over the poorly controlled Chinese investments (European Commission, 2019) [5]. Thus, in the near future, further market regulation for foreign capital is possible. This scenario could partially block companies like Huawei from entering one of the most important markets for China. Such barriers will question the potential successes of China’s international plans and might make the country focus more on emerging markets.

Other important aspects

Poverty alleviation has been one of the main issues demanded by society to be put first. It’s hard to overestimate its importance since the Chinese government managed to get millions of people out of poverty. The strategy is one of the aspects of the government's legitimacy. Both 13th and 14th plans and other policy documents aim at a complete solution to the problem of poverty in rural areas. The project is anticipated to be achieved through new financing channels that will resolve rural underdevelopment and an increase in employment. Considering the current pace in the sphere, we can expect this to be done by 2022 (Ministry of Foreign Affairs of the PRC, 2019, pp. 4-9).

Furthermore, the new plan will seek to resolve such a crucial social issue as the hukou registration system. The control over migration movements and rapid expansion of urban cities have been essential in the case of a centrally planned economy, but at the same time has contributed significantly to the inequality between urban and rural areas. These disparities consist of the lucking quality of education received by the rural inhabitants and considerably lower wages (Liu, 2005). The government has not introduced a detailed phased mechanism of the abolition of the hukou system yet, and the probability of a good solution is low. Despite all its limitations, the system helps not to overload the social infrastructure of large cities and does not lead to overurbanization. Keeping this in mind, the government will have to resolve the highlighted problem of poverty and education quality in rural areas. There is a possibility of a government trade-off and simplified issuance of registrations for those who already live in big cities. Still, it will take years to abolish the system that has been defining the structure of Chinese society for almost 70 years. Therefore, it can be concluded that the implementation of this part of the plan is extremely unlikely.

The impact of the COVID pandemic is an inevitable increase in attention to the medical industry innovation and insurance sector reform. In post-SARS months in 2003, the sales of health insurance grew up to 300%, now a similar effect is expected, which will support the industry even more. (Ipsos, 2020). Both innovation and insurance are the parts of the 13th and 14th plans, and the current crisis is not expected to interfere with their accomplishment but can further stimulate it. The medical system that required innovation for a long time is becoming strategically important. Results that were to be achieved from 2021 to 2025 are being produced now. For example, there has been noticeable progress in increasing the role of private medical services and equal treatment of non-profit medical institutions by the government.

Conclusion

Except for the two five-year plans' failure: second and third, the other ten has been completed or exceeded. The pragmatic approach of the government and proper pre-planning research allows us to be optimistic about the implementation of the fourteenth five-year plan's tasks. The country has been reducing its economic dependence on physical capital that began with Deng Xiaoping reforms and moving to other kinds, mainly social, human, and natural (Neuweg & Stern, 2019, p.2). Both 13th and 14th five-year plans are about transitions: transition to the ‘western style’ consumption-driven and sustainable economy. With scientific and technological innovations connected directly to the country’s growth, China is about to create a high-quality economy. Moreover, the greener goes its development, and the more attractive investments become to the international community and developed partners. Some obstacles the PRC will be facing the following five years: the continuing contradiction between SOEs and private enterprises' role, inevitable slowdown repeatedly indicated by Chinese officials and international researchers, six implications of the current pandemic, and global concerns about the rise of China and existing social problems. The government is yet to choose the right strategies that should allow the country to deal with the issues, but at the moment, we can make an optimistic forecast about the future fulfillment of a large part of the 14 five-year plan.

Literature

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1. https://www.bloombergquint.com/global-economics/china-considers-dropping-numerical-gdp-growth-target-for-2020

2. Liu S.J. (2018). Ten Years of China's Economic Growth (2018‒2027): Medium Speed Platform and High-Quality Development. CITIC Publishing Group, Beijing.

3. Bai C.E. & Zhang, Q. (2017). China's growth potential to 2050: a supply-side forecast based on cross-country productivity convergence and its featured labor force. China J. Econ. 4 (4), 1-27

4. https://www.forbes.com/sites/kenrapoza/2019/08/27/joe-biden-is-probably-the-only-man-who-can-save-china-in-202o/

5. Some of the actions recommended for the European Council:

Action 8: To adequately address the distortive effects of foreign state ownership and state financing in the internal market, the Commission will identify before the end of 2019 how to fill existing gaps in E.U. law.

Action 9: To safeguard against potential serious security implications for critical digital infrastructure, a common E.U. approach to the security of 5G networks is needed. To kickstart this, the European Commission will issue a Recommendation following the European Council.

Action 10: To detect and raise awareness of security risks posed by foreign investment in critical assets, technologies, and infrastructure, Member States should ensure the swift, full and effective implementation of the Regulation on screening of foreign direct investment (European Commission, 2019).


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