Beijing Will Formalize Its Post-Growth Platform in New Five-Year Plan

It’s five–year plan (FYP) time again! While much of the world continues to focus on the pandemic, Beijing is setting its sights on the next five years and its broader vision for 2035.

The 14th FYP is a little different than usual. For one, it is the first FYP cycle in about two decades that is taking place within broad political continuity under Xi Jinping. For the past few decades, a top leader would oversee the implementation of only one FYP cycle, while the second FYP cycle would be implemented by a new leader. Having a political transition in the middle of an FYP cycle can often impede execution or at least make it more challenging. Moreover, the 14th FYP will be the cornerstone of Beijing’s 2035 targets, which means it will provide more clues to China’s long–range goals.   

The full plan, which will not be released until 2021, will be all-encompassing and massive. Here I will only focus on Beijing’s intended economic priorities over the next five years and the rationales behind that intent. I will examine whether and how China will execute on that intent separately.  

Does Dual Circulation Really Mean Inward Turn?  

One of the main themes of the 14th FYP will be “dual circulation,” a term Beijing coined in early 2020. Although the term has been widely interpreted as an inward shift, I have a different interpretation of what it will mean in practice. It is true that China will focus more on domestic demand, but that focus depends on generating sustained organic growth, not stimulus-driven growth spurts. Dual circulation, then, is mainly about repackaging existing reforms to achieve that kind of virtuous growth, which requires productivity enhancements, market competition, and a healthy business environment.  

These three factors, if realized, will naturally make China’s economy more attractive and open, which is now more necessary than ever to stabilize a rapidly deteriorating external environment. This urgency to alleviate external pressure, which is not conducive to China’s growth prospects, will make reform execution more likely in the next five years than in the recent past (see Forecast 2025 on the economy).  

Moreover, dual circulation is simply an acknowledgement of reality. For years, many have called for rebalancing the Chinese economy. At a macro level, that rebalancing has actually happened since the global financial crisis. China’s trade surplus has already dropped from more than 8% of GDP to around 1% of GDP, while the share of domestic demand has risen accordingly by 7% of GDP over the same period.   

But the form that rebalancing has taken is not optimal nor sustainable because it has been driven by domestic investment. Liu He, China’s top economic policy advisor and Vice Premier, has long argued for a more sustainable rebalancing based on domestic consumption and income growth. In fact, many elements of the “dual circulation” strategy are identical to Liu’s rebalancing proposal he published after the financial crisis but were never implemented. With Liu now in charge of reforms, there is a higher likelihood that more concrete actions will be taken. 

Inequality in the Spotlight 

China is no stranger to inequality, which has been widening for a number of years. It is a focus that will receive even more prominence in the 14th FYP, particularly as Xi has repeatedly emphasized it as a guiding principle for the plan. His anti-poverty campaign can be viewed as the opening salvo in tackling inequality, with the next phase focusing more on income groups that are slightly above poverty.    

A focus on inequality also means much less emphasis on headline growth and much more on income growth (see below on GDP target). From a policy perspective, this means addressing some of the longstanding distortions in labor and land markets, namely hukou and rural land ownership. 

Even though Beijing has been aggressively pushing for hukou reform, the outcome leaves much to be desired. Over the past five years, the size of the migrant population has remained basically the same, which means not many are receiving hukou. As a result, Beijing will likely aim for at least 50% of the population, or 700 million people, to have urban hukou by 2025.  

Normalizing land ownership, particularly rural land, will also narrow the income gap between rural and urban residents. Rural land transactions are hardly market based, since local governments depend on land sales as a major source of revenue. In other words, rural land is a proxy for local-level fiscal policy.  

Both problems have shown signs of improvement recently. Obtaining urban hukou has become easier for migrant workers, while modest progress has been made in rural land ownership. Continued improvement in these areas over the coming years will provide additional income for rural residents, who makes up half of China’s population and the majority of the lower income group that will be targeted.  

Unemployment Target Taking Over 

Since first added as an annual target in 2018, the survey-based unemployment rate has ascended to becoming a key target for Beijing. The target has been central in 2020 as China recovered from Covid-19, and it will likely become a binding target (5.5%) in the 14th FYP for the first time. The GDP target probably won’t disappear altogether, but it will likely be watered down significantly. With the shift in emphasis towards inequality and quality of life, the GDP target’s days are numbered and will increasingly be superseded by the unemployment target.  

Deleveraging and Property Tax 

There may be surprises in store on deleveraging and property tax in the 14th FYP. Now that the Chinese economy has rebounded from the pandemic, a renewed emphasis on deleveraging and property tax should be expected.   

Managing the recovery from the pandemic has been the overriding priority, putting all other agenda on the back burner. But Beijing has no intention of abandoning deleveraging and its battle against excesses in the economy. The property tax, which could well be implemented in the next five years, is intended to cool down a property market that is perennially prone to overheating.  

Whatever neologism or new content comes out of the FYP, the intent will be broadly clear that China will need to continue reforming key distortions in the economy to achieve its vision for 2035. As for the capability to execute, that’s where skepticism abounds. Much of that is legitimate, judging by the fact that Beijing has been long on promise but short on delivery. But what has been will not always be, and future analyses will examine and track how China is executing on its best-laid plans.   

Houze Song is a research fellow at MacroPolo. You can find his work on the economy, local finance, and other topics here.