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China’s Next Five Years

10 November 2020   |  

One of the more surprising (though not entirely unanticipated) announcements from China’s recent Fifth Plenum outlining its five-year plan for the country’s economy was that the country would no longer provide a target GDP growth rate as it has historically done. While some observers may view it as a signal the country is decreasingly able to generate the heady growth rates of years past, it’s worth considering alternate possibilities. Namely, a shift in focus from absolute growth toward quality of growth—a move with significant implications.

Many also see the shift as an attempt to avoid the middle-income trap—the tendency of once fast-growing nations to get stuck at middle-income levels as they remain reliant on export- and manufacturing-oriented jobs and industries, rather than diversifying into higher-value, higher-skilled jobs and industries.

Moving up the supply chain and into more advanced industries are natural—and arguably necessary—evolutions to becoming a high-income country. China’s current per capita GDP is roughly $10,000—putting China overall squarely in the middle-income space—a number it expects to triple by 2035. If China can successfully foster advanced industries, it could kick off a self-reinforcing virtuous cycle. Greater technological diffusion and innovation would create jobs that help lift citizens’ incomes, provide domestically produced higher-end goods and services, as well as improve the skillsets, productivity and competitiveness of China’s workforce.

However, given roughly one-fourth of China’s GDP comes from manufacturing and the country’s population is both aging rapidly and growing slowly, structural reform success is not assured. As President Xi outlined in May, China will deploy a “dual circulation” strategy, which aims to develop greater economic self-sufficiency while maintaining a near-term reliance on exports. So one question becomes: Will other countries continue supporting China’s growth-through-trade approach, knowing the country’s intention is reducing its economic dependence on the rest of the world? This has been an open question in the US, as well as with Europe, Australia and Japan.

Another question is: What form will ongoing global trade tensions with China take? China’s ascendancy as the world’s factory isn’t the only reason for recent years’ trade conflict with the United States. Intellectual property protection and national security are oft-mentioned issues—as highlighted by the US’s global full-court press against Huawei. These issues are unlikely to go away any time soon and may worsen if China is able to make greater headway in more technologically advanced (and therefore, potentially more sensitive to other countries) industries.

Companies in such advanced industries—particularly those domiciled in countries like Japan, South Korea and Germany—may feel increasingly caught in the middle. Both the US and China are likely key end markets for these companies, so they will need to adeptly navigate a geopolitical minefield that has become US-China relations. These companies also face the prospect of greater competition in a hugely important Chinese market against homegrown companies likely favored by China’s government. Furthermore, greater innovation in China may increase corporate and geopolitical tensions when it comes to establishing global standards.

All told, the recent plenum has likely raised more questions than it’s answered. Though there’s a case to be made that China’s announced intentions represent necessary next steps in the country’s ongoing evolution—particularly if it intends to continue its rise from emerging status to more developed.

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