- October 26, 2020 Macro Outlook
Forecast 2025: China Adjusts Course
“It’s tough to make predictions, especially about the future.”
– Yogi Berra
Forecasting is a fraught exercise. It is made all the more daunting when paradigms shift, testing basic assumptions and altering drivers of change. If 2020 has yielded any lessons, it is that the foreseeable future invites more questions than it provides concrete answers.
Yet amid these muddied dynamics, the search for clarity is more important than ever. From the existing global system to relations between preeminent powers, the status quo may be irreparably shaken. What lingers in the air is a palpable sense that an era of creative destruction is upon us. It is an unfolding drama where the ending has yet to be written.
The starring role that China plays in this drama makes understanding its general trajectory—from the economy to domestic politics and technology development to energy policy—of immense interest and import to the world, and particularly for its peer competitor the United States.
So what kind of China should be expected by 2025? That singular question animated this effort to forecast the country’s path forward over the medium term.
Our simple answer: A China that will be near-majority middle class for the first time, with increasing technological parity with Silicon Valley and a less carbon-intensive energy landscape, all under the aegis of a stronger Xi Jinping and his vision of governance. Achieving these outcomes will require trade-offs, in this case a China that will likely redouble on domestic priorities and moderate its appetite for global adventurism.
This view of a more capable yet more outwardly cautious China is based on a composite of four scenarios across specific functional areas, bounded by the timeframe through 2025. It is also predicated on several macro assumptions and key factors that are likely to determine China’s behavior over that time period. In other words, this forecast exists within a defined scope, the elements of which are explained below.
We decided on a medium-term time frame for several reasons. First, conditions can change on a dime, but we believe five years, relative to a 10- or 20-year forecast, is a more manageable timeline to provide relatively concrete and specific scenarios for the future of China’s political economy.
Second, the five-year cycle also coincides with China’s own 14th Five-Year Plan (FYP, 2021-2025) that essentially sets the parameters on what to expect in terms of priorities and key agendas. In addition, the time period also overlaps with the new US administration and veers into the first years of Xi’s third term.
Three, Chinese leaders themselves have imbued this next FYP cycle with more significance than usual because it begins the 15-year period leading up to 2035, the midway status point for Xi’s national rejuvenation agenda that runs up to 2049. In this context, the 15th and 16th FYPs will be building directly on the outcomes of this five-year cycle even more so than in the past.
Still, five years can be an eternity in an environment where current shifts accelerate and unexpected factors manifest to knock China from its intended path. These uncertainties could lead to various permutations of China’s trajectory and a wider range of outcomes than we currently expect.
Recognizing this degree of uncertainty, we nonetheless aimed to distill, to the best of our abilities, a clear and comprehensive view of how China’s political economy will be shaped.
Grappling with the complexity of current dynamics and the numerous factors at play is important. As such, it was necessary to bound our forecast within clear assumptions for the five-year time period. These assumptions are:
- China’s political economy will remain largely what it is today, ruled by a strong Chinese Communist Party (CCP) led by General Secretary Xi Jinping.
- Direct US-China military confrontation is unlikely, but competitive dynamics and tensions will become more explicit and play out across all major geographies.
- Globalization will likely continue to stall as countries turn more inward and regionalism becomes more prominent.
We also eschewed low probability, high impact “fat tail” scenarios, such as a “Taiwan confrontation” or a “political transition crisis.” Such scenarios remain possible, but what’s possible is not necessarily what’s probable. They are, however, certainly worthy of discussion and continued monitoring beyond this product because of their outsized impact on the future of China and global markets.
In our view, these macro assumptions preclude entertaining the outlier scenarios above and set parameters on the domestic and global environment in which China will operate—an environment that can both facilitate and constrain China’s behavior. If these key assumptions are undermined over the medium term, then the entire forecast will need to be reevaluated accordingly.
In addition to these macro assumptions, it’s important to determine what key factors may have changed that inform how we think about China going forward, to help avoid over-reliance on simple, straight line projections. We believe there are two key factors, one domestic and one external, that have changed and that matter for our forecast to a considerable degree:
1. Stronger center, weaker localities: from dealing with debt and growth to executing on reforms and environmental initiatives, local governments are being kept on a much shorter leash and are less able to freelance relative to just five years ago. The main manifestation of this dynamic will be Beijing’s continued fiscal hawkishness and increased actions to induce local compliance with central mandates.
2. Global power under global scrutiny: Beijing faces its toughest external environment in about a generation, centered on US-China tensions. China likely can no longer count on a relatively stable external environment, one of the key ingredients that has facilitated its economic success to date. Its conduct and intent, both domestic and foreign, will be put under a global spotlight, forcing it to respond.
Building on these factors and the macro assumptions, our team constructed base case scenarios for China’s economy, politics, technology, and energy. Each base case represents the most likely outcome over the five-year time period. Needless to say, these base cases do not represent the totality of scenarios. But we believe they are the most probable realistic outcomes based on our understanding and approach to analyzing China.
SUMMARY OF BASE CASES
This forecast product has four components: economy, politics, technology, and energy. Each section contains the lead analyst’s base case calls, followed by specific assumptions and leading indicators, and then in-depth analysis of each base case with assigned probability. Each section then concludes with a less likely secondary scenario as a complement to the base case.
Economy: Eluding the Middle Income Trap
- By 2025, Beijing will have had little choice but to reform its way out of challenges that result in a Chinese economy that will likely become more open, balanced, and efficient.
- China faces one of the most daunting external environments in decades, which ironically will likely push Beijing to further embrace foreign direct investment (FDI) and improve the business environment.
- On the domestic front, China’s “internal circulation” agenda will be less about self-reliance but focus on improving productivity and inducing more local competition, while keeping a lid on financial risk.
- The pursuit of reform priorities means that at the end of the 14th Five-Year Plan (FYP, 2020-2025), China will likely have eluded the “middle-income trap” and become a near-majority middle-class country.
Politics: Stronger as Xi Goes
- In 2025, Xi Jinping will remain General Secretary of the Chinese Communist Party (CCP), Chair of the Central Military Commission, and President of the People’s Republic of China. He will likely emerge the strongest he has ever been after the 20th Party Congress in 2022.
- It’s unlikely that a clear successor will emerge from the 2022 political transition, to avoid diluting Xi’s authority as the CCP focuses on executing his domestic reform agenda.
- Xi will likely focus his power on “the politics of execution” in his third term, as the 14th FYP begins his strategy to transform China into a superpower by 2035. This program will strengthen governance, discipline, and ideology to enhance Beijing’s ability to transmit policy through central agencies and local governments.
- A strengthening focus on domestic priorities will involve some trade-offs, so Xi is unlikely to announce any major new foreign policy initiatives in the next five years.
Technology: Fragile Tech Superpower
- By 2025, China’s technology ecosystem will have matured and be on par with Silicon Valley in terms of dynamism, innovation, and competitiveness.
- That dynamism will increasingly take the form of industrial applications of information technology, as the locus of Chinese innovation shifts from the consumer internet to the industrial internet.
- China will largely succeed in deploying highly capable “new infrastructure”—cloud computing, 5G networks, smart cities, and surveillance networks, among others—to facilitate this transition to the industrial internet.
- US export controls on semiconductors will act as a modest brake on China’s new infrastructure rollout. But expanding restrictions on semiconductor manufacturing equipment will mean that China remains vulnerable to future interruptions to its supply chain for advanced chips.
Energy: Setting Course for Peak Emissions
- By 2025, China will be close to achieving peak emissions as a result of more ambitious actions to bolster renewables, pivot toward market mechanisms, and enhanced energy efficiency measures.
- Renewables will benefit from cost competitiveness relative to coal even in the absence of subsidies.
- Power sector reforms announced in 2015 will see meaningful progress to better support Beijing’s decarbonization efforts.
- These factors will mean that non-fossil energy sources such as nuclear, wind, and solar will be the major beneficiaries relative to coal over the medium term.
This analytical product has been a collective MacroPolo endeavor. We harnessed our specialized knowledge and our broad understanding of how China functions to arrive at a comprehensive assessment of the country’s trajectory.
It was a challenging process to say the least, as all attempts at forecasts are. Yet through it all, this very exercise sharpened and disciplined our own thinking. Whether you agree with our assessment, we hope you find it as useful and clarifying as we did in creating it.
Damien Ma is the director of MacroPolo. You can find his work on energy, politics, and other topics here.
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