Priorities of China’s Economic Policy for the Next Five Years －An overview and features of the next Five-Year Plan as announced at the CPC Central Committee’s 5th Plenary Session

The context of the 5th Plenary Session of the 19th CPC Central Committee

At the Fifth Plenary Session of the 19th Central Committee of the Communist Party of China (CPC), held from October 26 to 29, President Xi Jinping explained the CPC Central Committee’s proposals for formulating the 14th Five-Year Plan for National Economic and Social Development and the Long-Range Objectives Through the Year 2035. The full text of the proposals was made public on November 3.

The proposals represent a basic framework for economic policy management in 2021-25 in China; they constitute a key document for forecasting the Chinese economy.

Conventionally, such a basic policy on economic policy management was laid out at the third plenary session of a CPC Central Committee.

In the 19th CPC Central Committee (from October 2017 to the autumn of 2022), however, the Third Plenary Session (February 2018) focused on reforms of CPC and state institutions, while the Fourth Plenary Session (October 2019) took up the issues of maintaining and developing the “one country, two systems” principle. The overall framework of economic policy management had not been presented.

Consequently, the framework that would have normally been introduced in the Third Plenary Session was laid out at the Fifth Plenary Session.

The third plenary session of a CPC Central Committee that marked a watershed of particular importance was that of the 11th CPC Central Committee in December 1978, which announced the reform and opening-up policy for the first time.

The announcement marked a major turning point for the Chinese economy, which initiated a transition from a government-initiated planned economy to a market economy. In today’s China, the prices of almost all products and services are determined by the demand-supply balance in a market mechanism.

Under the planned economy in the past, however, the prices of all products and services were decided by the government, which also dictated every aspect of corporate activity, including production, capital investment, employment, wage levels, and fund procurement.

Corporations and individuals alike were banned from expanding production, capital investment, and employment with voluntary efforts to increase revenues and wages.

Accordingly, there was little appetite for economic development, nor were there any wealthy people.

The way to such a fundamental shift from a state-controlled economy to a market economy was paved by the above-mentioned CPC Central Committee’s third plenary session. This shift marked the start of China’s rapid economic growth that has continued to the present.

The third plenary session of subsequent CPC central committees announced shifts in important policy in relation to many key aspects of China’s economic policy management, including agriculture, corporate management, financial and fiscal policy, and the price system.

The 3rd plenary session of the 18th CPC Central Committee, held in November 2013 under the first Xi administration, announced the policy of accelerating the move toward a market economy by stating, “China will deepen its economic reform to ensure that the market will play a decisive role in allocating resources,” a remark that attracted global attention.

Given such a historical background, observers expected that the Fifth Plenary Session would announce a new important policy of some sort.

However, the full text of the proposals seems to contain no bold change of policy that matches the important reform policies that attracted attention in the past third plenary sessions of the CPC Central Committee. It appears that the text is just a comprehensive restatement of the reform policies that have already been announced.

Let me first present the gist of the proposals.

The policy of economic policy management as announced at the Fifth Plenary Session

The following are the main points that attracted my attention in the policy of economic policy management that were articulated in the Fifth Plenary Session:

- For the forecasts for 2035, China will see improvements in its economic and technological prowess, join the club of advanced innovative countries, demonstrate its clear strengths in international economic cooperation and competition, and rank among the middle level of developed countries in terms of per capita GDP (gross domestic product).

- With domestic economic circulation at the center, China will establish a new development pattern featuring domestic and international dual circulations that complement each other.

- China will unswervingly advance reform and opening-up. It will strengthen its governance of the country, break through obstacles to high-quality economic development, and improve resource allocation efficiency.

- China will build a high-level market economy, improve resource allocation significantly based both on the system of protecting intellectual property rights and on the market mechanism, and achieve fair competitive conditions.

- China will support the formation of international science and technology innovation centers in Beijing, Shanghai, and the Guangdong-Hong Kong-Macao Greater Bay Area.

- China will improve the corporate capacity to develop technologies and allow entrepreneurs to play an important role in technological innovation. To this end, China will give tax incentives to corporate basic research.

-By industrial sector, China will focus on developing new infrastructure that covers 5G communications, IoT, big data centers, and suburban transportation and integrated logistics networks.

- China will advance mixed ownership reform regarding state-owned enterprises and promote the sound growth of the non-public ownership economy.

- China will impartially protect the intellectual property rights owned by private enterprises and profits gained by entrepreneurs based on law and break through obstacles to the development of private enterprises.

- China will promote market-oriented reforms of such production factors as land, labor, capital, technology, and data.

- China will (1) review the mechanism of land expropriation by the government, (2) study the concept of rights to own and use residential land to protect the rights of farmers who have moved to cities to obtain a land-use license and use residential land, and (3) encourage onerous transfers based on law.

- China will promote the development of such areas as the Beijing-Tianjin-Hebei Region, the Yangtze River Economic Belt (covering Chongqing, Chengdu, and Wuhan cities), the Guangdong-Hong Kong-Macao Greater Bay Area, and the Yangtze Delta (Shanghai city, and the Jiangsu, Zhejiang, and Anhui provinces). It will also increase fiscal support for less developed parts of China, especially the northeastern region (the Liaoning, Jilin, and Heilongjiang provinces).

- China will support the settlement of farmers in cities by (1) securing housing largely through providing fiscal support and building housing for rent, (2) ensuring basic public service delivery, and (3) promoting reform of the household registration system.

- China will build a new economic system that is more open to the outside world. It will promote trade and investment liberalization, give the same treatment to foreign enterprises as that to domestic ones, and protect the legitimate interests of non-Chinese firms.

-China will build a sound elderly care system and basic health and nursing care insurance and raise the statutory retirement age in stages.

- China will maintain the long-term prosperity and stability of Hong Kong and Macao. It will maintain the high-degree-of-autonomy policy that upholds the “one country, two systems” principle as well as the governance of Hong Kong by Hong Kongers and the governance of Macao by Macaoans.

- China will steadily implement the legal system and enforcement mechanism for the maintenance of state security for the special administrative regions.

Reasons why a major change of policy was not laid out

Although the Fifth Plenary Session listed important policies regarding state economic policy management as shown above, it did not announce any major change of policy like those set out in the past third plenary sessions of a CPC Central Committee. The proposals made at the Fifth Plenary Session stand out in that they only reviewed and reinstated the reform policies the Chinese government had set out and built on.

The phrase “dual circulations” often cited in recent official documents and remarks by high-ranking government officials does not represent a major change of policy if the idea is to make the domestic and international economic circulations the basis for the economic development of China with the former at the center, as mentioned earlier.

Other agenda items did not contain what could be described as representing a major change of policy.

Two factors in economic policy management may have been behind the fact that the proposals were as they were.

First, the 19th CPC National Congress in October 2017 decided to fundamentally change the policy of quantitative economic expansion, that is, economic growth, a long-held basic policy for national economy building since the foundation of the People’s Republic of China. It set out a new basic principle of improving the quality of the economy and society.

As this change of policy was so fundamental, specific policies to realize the new principle were still being formulated in each sector.

If a new change of policy had been introduced before the policy package required to implement the fundamental change of policy is largely filtered down to each sector, that would have made the smooth and coherent management of policy difficult.

Second, seen from a long-term perspective, the Chinese economy today is in the final phase of the rapid economic growth that has lasted for nearly 40 years since the 1980s.

Many government officials and economists in China expect that the 2021-25 period will likely be the last five years of rapid economic growth.

Economic reform should preferably be implemented in the phase of economic stability as it often entails pain in the form of corporate failure or unemployment.

The economy will likely be destabilized if bold reforms are implemented in the second part of the 2020s, a phase where the economic growth rate is expected to decline year by year.

If that is the case, the 2021-25 period must be the last opportunity to advance reforms in a stable manner.

As such, it is necessary to carry out the economic reforms that have been left undone in the management of various policies to the extent possible during this period.

The Chinese government recognizes that a long list of essential items on the reform agenda have been left undone.

Based on this recognition, the government set the goal of pressing ahead with necessary reforms during this period of five years.

No new reform policies were necessary. It was quite natural for CPC to aim to implement as many reform items as possible to the largest extent possible. That was a reasonable decision.

Against the background described above, no bold change of policy was incorporated in the proposals.

Nevertheless, the sectoral reform items cited in these proposals are all important. The government has an onerous responsibility to carry them out in the next five years.

To what extent can China implement these important priorities and brace itself for the expected tough phase of economic stability in the second half of the 2020s? The next five years will determine the fate of the Chinese economy.