One year into the 14th FYP: Policy challenges on many fronts amid a volatile context

The 14th Five Year Plan (FYP) is the key planning and signaling document for the Chinese government for the period between 2021 and 2025, and it will be overlapping with the “new era” – characterized by President Xi’s almost set and unprecedented third term from 2023 onwards. The plan will thus play a significant role towards meeting the second centenary goal of the leadership under Xi – “building a modern socialist country by 2049”, with the mid-term milestone of “basically achieving socialist modernization by 2035”.

It came as no surprise then that the current FYP that was passed by the legislature at last year’s Two Sessions extends its reach beyond the next five years and to Beijing’s 2035 vision. It, however, for the first time does not set a specific numeric GDP growth target – an important instrument for the government in the past to set market expectations. The annual government work reports delivered by Premier Li Keqiang therefore have set the growth targets for the coming year at “above 6” percent and “around 5.5” percent for 2021 and 2022 respectively.

In light of the internal and external environment in late 2020 (when the 5th Plenary session of the CCP was held, and where the FYP was discussed), and with China’s medium and long-term growth trajectory in mind, the 14th FYP places particular emphasis on questions of national security, scientific and technological innovation, economic growth, the environment as well as social welfare.

One year into the 14th FYP, however, many things have changed compared to when the plan initially was passed. The domestic policy unpredictability of the past year and escalating geopolitical risks have put a dent in the confidence of private and international investors as well as domestic consumers.


China is in general facing more economic headwinds. In the early phases of the pandemic, the country managed to leverage its comparative advantages in epidemic prevention and control to consolidate and strengthen its position in key industrial chains and increase its share in global trade – the so-called “epidemic dividend”. The roaring export sector together with boosted infrastructure investments helped the Chinese economy rebound after a weak 2020 to a whopping 8.1 per cent growth rate in 2021.

This economic performance early last year, at a time when economic figures elsewhere looked more dire, led the Chinese leadership believe in a “window of opportunity” for painful regulatory shifts such as those under the banner of Common Prosperity. Since late 2020 and the last-minute intervention to stop Ant Group’s record 37bn $ IPO, authorities have unleashed a flurry of regulatory tightening on the platform economy, private tutoring, education providers and property developers that sent a chilling effect on private investment and broadly on household consumption. This, together with a lower rebound-effect led to a record low Q4 growth rate of only 4 percent.

Since last December, when the Central Economic Work Conference convened, policymakers have therefore been emphasizing “stability on six key fronts” – stability on employment, finances, foreign trade, foreign investment, investment, and expectations –, a return to something policymakers last mentioned in 2020 at the very outset of the pandemic.


No shift, but a refinement of policies, reassurance for markets and re-prioritization


The economic headwinds and weak market confidence compelled Chinese top economic decision-maker Liu He to make an unusual intervention last week with a speech at a special meeting of the State Council’s Financial Stability and Development Committee (FSDC) to reassure investors that the government would better coordinate among regulatory agencies in rolling out potentially growth-dampening measures and introduce policies that are favorable to the market and beneficial to the economy.

One formulation in the meeting summary is particularly interesting. “For any policy that will have an impact on financial markets, it should first be coordinated with financial regulators,” Liu is reported as having said to this top financial regulation and economic development body. Here, he is particularly referring to powerful agencies like the Cyberspace Administration of China (CAC) given their ubiquitous influence and presence in Chinese socio-economic life and spearheading role in cracking down on Chinese platform companies. This is also an indication that last year’s regulatory storm has run its course, and regulatory action will become more subtle from now onwards.


In a similar signal, the readout from the special meeting of the FSDC also stated that Beijing would apply a brake on plans to expand trials of a property tax, a relief for a highly indebted property sector that would have been further strained. It is widely anticipated that the ongoing fine tuning of real estate policies as well as the lowering of down payments and first-home mortgage rates would support property sales and embattled property developers, despite the unchanged view by Beijing that “houses are for living in, not for speculation.”


As per a report by the Washington-based think tank CSIS, the emphasis of this year’s Two Sessions on achieving somewhat higher short-term growth and sticking with zero-Covid is that other long-term goals, such as rebalancing the economy toward consumption and reducing inequality as part of the drive for common prosperity, are being put off.


In addition to common prosperity, the other casualty of shifting priorities in the short term is green development. Rather than setting specific targets for decarbonation and cutting energy consumption for 2022, Li Keqiang in his outlook called for a flexible assessment of energy intensity within the framework of the FYP. This flexibility reflects Beijing’s concern that too stringent decarbonization targets could hurt the economy and energy supply.

Although China does not move away from its official climate goals of peaking emissions by 2030 and reaching carbon neutrality by 2060, the government is unlikely to pursue ambitious decarbonization efforts anytime soon and will accept a high level of carbon emissions.


Security as the new overarching paradigm


That said, the scrutiny of the first year of the FYP implementation will find that China does not deviate too much from its roadmap for economic and social development. But security considerations now trump everything. The Russian war of aggression against Ukraine added to the urgency to secure stable energy and food supplies amid escalating geopolitical risks. In the hypothetical case that China suffers similar sweeping sanctions from the West, Beijing may not be able to cope the way Putin believes he can, because Russia is at least self-sufficient in terms of energy and food security.

Also, the strategic competition with the US will be here to stay, and technology decoupling or nationalist tendencies are expected to further strengthen. So, as the FYP drives home the message that China needs a grand strategy about its supply chain security, China will double down on its efforts to boost its core competitiveness in manufacturing and safeguard supplies of raw materials and key components. The government is expected to make more investments in upgrading traditional industries and build domestic industrial clusters to reduce its reliance on foreign technology and raw materials. These measures are in line with the strategic objectives in the FYP, namely that China should attach greater importance to the manufacturing sector, avoiding premature deindustrialization and stopping ceding grounds to the services sector.

In the same vein, the focus on innovation-driven development is keeping momentum and key sectors like advanced equipment and information technology saw greater spending in research and development.

As China’s economy is grappling with the so-called “triple pressure”, a term to describe the current cocktail of problems – shrinking demand, disrupted supply and weakening expectations, the government is again faced with a quandary about how to balance long-term structural reform and short-term stabilizing growth.

Crucial policy decisions ahead

All in all, the 14th FYP and its successors will help lay the groundwork for China’s achievement of the second centenary goal. However, even President Xi, arguably China’s most powerful leader since Chairman Mao, is getting his reality check, forcing his government to refine some signature projects, ranging from common prosperity to the Belt and Road Initiative. The war in Ukraine and what has been perceived by the “West” as China’s alignment with Putin’s Russia are set to make China’s external circulation – the second part of his “dual circulation” economic strategy – hard to sell at best and accelerate investor hesitancy and lead to further decoupling at worst.

The Chinese finance publication Caixin’s recent editorial can serve to illustrate a sentiment in the face of this situation: “Correct choices are highly dependent on the foresight of decision-makers, as well as the conditions of a nation’s history, geography, culture and population. Good systems are based on reform and opening up that gradually integrate proven international practices. A country eager for development must deepen its reform and strive to seek and maintain a good international environment.”

Should China continue to drag its feet in long-overdue structural reform and dig in its heels in its positioning with Moscow, it may face both stronger external and internal headwinds in the years to come. This may compound to the risk that the current FYP won’t be able to progress according to plan.