Manufacturing makes a comeback in the 14th five-year plan

• The 14th five-year plan (FYP) covers a wide range of economic policy goals meant to guide China’s development in 2021‑25. The Economist Intelligence Unit examines goals relating to economic growth, innovation and manufacturing.

• We believe that China will maintain an implicit target for real GDP growth in 2021‑25, at 5‑6% on average, in order to double real GDP from its 2020 level by 2035. Officials will also promote innovation to reverse trends linked to declining productivity growth, as well as to offset risks connected to import dependency.

• The 14th FYP elevates the status of manufacturing to move China up the value chain and consolidate its existing competitive advantages. This will preserve the country’s substantial goods trade surplus in 2021‑25, despite worsening geopolitical strains.

The key themes under China’s 14th FYP have generally aligned with our existing expectations. When considered alongside a complimentary “long-range” development plan to 2035, which was also passed at the annual session of the National People’s Congress (NPC, the legislature), it provides a roadmap for the ambition of Xi Jinping, China’s president, to achieve “socialist modernisation” within the next 15 years. More broadly, the 14th FYP and the 2035 goals aim to hasten China’s transformation as benchmarked against developed economies; such an agenda meshes with Mr Xi’s own political plans.

The new plan has, however, been produced in an environment radically different from that of the preceding 13th FYP (2016‑20). US‑China tensions and concerns over economic security reflect new geopolitical concerns. The fact that China has recovered from the coronavirus pandemic more quickly than other major economies has also yielded a more ambitious policy agenda, including renewed emphasis on indigenous innovation—a controversial term owing to long-standing international concerns over growing protectionism in the technology sector.

GDP targeting: from hard to soft

The 14th FYP breaks new ground by not setting a target for annual average real GDP growth. We see this as a positive change, which suggests greater flexibility in monetary and fiscal policy. This does not mean that economic targets will not apply; the government has stated that it will still set an annual GDP target according to “actual conditions”, as it has for 2021 (although this year’s target of “above 6% growth” will be met easily owing to the low base of comparison from 2020). Informally, senior officials, including Mr Xi, have discussed a goal of doubling real GDP between 2020 and 2035 and raising per capita GDP to that of a “moderately developed” economy. Given this, we believe the implicit target for real GDP growth in 2021-25 will be 5-6%. This matches our own forecast that growth will decelerate from 8.5% in 2021 to 4.5% by 2025.

(State-led) innovation as the core

The pursuit of innovation-driven development is at the core of the 14th FYP, as part of moves to address declining productivity growth in recent years. The plan calls for research-and-development (R&D) spending to increase by more than 7% a year during the period of the plan. Within this, the share of spending on basic research is planned to increase sharply, from 6% of R&D expenditure in 2019 to 8% in the 14th FYP. The goal is to help to break the dominance of advanced economies in areas of core technology.

Compared to the discussion of innovation in the 13th FYP, the new plan shows a tighter focus on strategic and national security-related goals. Specific sectors slated for development include quantum information, artificial intelligence, integrated circuits and biomedicine and life sciences. The 14th FYP also makes clear that state-run laboratories and state-owned enterprises (SOEs) will take the lead on innovation; for example, it specifically directs R&D expenditure by SOEs to surpass the national average. Although the FYP encourages private enterprises, including small and medium-sized enterprises, also to increase R&D spending, the language in past FYPs on tying innovation to “mass entrepreneurship” was not included in the new FYP. This suggests a policy shift towards supporting existing industry leaders rather than encouraging new market entrants, amid growing instances of subsidy wastage and fraud in recent years.

Manufacturing makes a comeback

The 14th FYP’s emphasis on manufacturing contrasts with the 13th FYP, which focused instead on cultivating services industries. That plan set a target for the tertiary sector to account for at least 56% of GDP by 2020 (it reached 54.5% in 2020). The new plan has removed this target, and instead calls for the share of manufacturing in the economy to remain “basically stable”. Given that the manufacturing sector’s share of GDP has declined steadily from a two‑decade peak of 32.5% in 2006 to 26.2% in 2020, the plan suggests that the authorities aim for manufacturing growth at least to match services growth in 2021‑25.

Underpinning this shift is a concern that productivity and employment will deteriorate if China moves to a purely services-driven growth model. China sees Germany as offering a better economic model than the US and UK—markets in which Chinese authorities see the manufacturing sector as having been “hollowed out”. The scramble among Western countries for medical goods and vaccines in the early months of the pandemic has highlighted the risks associated with weak manufacturing capacity and a lack of control over critical supply chains. Those factors demonstrated to China’s leadership the critical position that the country holds in global supply chains—even as the shocks derived from the US’s technology export controls have exposed critical areas of manufacturing weakness.

These goals indicate strong policy support for manufacturing in 2021‑25, particularly as China aims to build on its existing competitiveness by building “complete” domestic supply chains in sectors ranging from technology to high-speed railways, power equipment, renewable energy and ship manufacturing. Recurring attention to supply-chain diversification affirms long-standing goals aimed at reducing reliance on certain countries, including the US, as part of China’s “dual circulation” strategy. However, the FYP also emphasises the importance of retaining key industrial chains onshore, suggesting policy support to counter the ongoing exodus of certain industries, such as low-end electronics, to South-east Asia. In situations where relocation (or near-shoring) is unavoidable, China will aim to direct these activities to countries with which it enjoys stable trade relations; its membership in the Regional Comprehensive Economic Partnership may play a key facilitating role here.

China’s aim of retaining its competitiveness in manufacturing will keep the country’s goods trade surplus substantial, particularly as its importance in global and regional supply chains deepens in 2021‑25. This will remain a source of friction in the country’s trading relations, especially as China deepens its presence in higher value-added areas.

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