At its annual meeting in October, the Chinese Communist Party approved its plan for economic policy over the next five years through 2025, as well as a long-term plan through 2035. It is strange that China, which now claims to be a market economy, insists on implementing a five-year plan -- a practice acquired from the Soviet Union in the 1950s. Moreover, the plan makes clear China's strategy to seize technological hegemony from the U.S. The friction between them that will likely grow as a result is worrisome.
The fifth plenary session of the party's Central Committee, which ended on Oct. 29, was also a prelude for the party's National Congress that will take place in 2022. President Xi Jinping's position as leader is set to become the main focus of that gathering. The long-term plan that runs through 2035 -- the first of its kind since 1995 -- is an effort to lay the political groundwork for Xi to remain in place for the next 15 years.
The five-year plan for 2016-20 called for an economic growth rate of at least 6.5%. Such a target is unlikely to appear in the plan beginning in 2021. It will be interesting to see how the economic growth target will be incorporated into the draft of the new plan, set to be released soon.
In 2017, China laid out the goal of having "socialist modernization basically realized" by 2035. It was a major shift in China's ambition to catch up with the U.S. economically. Conventional forecasts predicted China would match the U.S. around the mid-21st century, but Chinese leaders pushed that target forward by 15 years. They held off on spelling that out clearly at the time, however, out of concern over the growing confrontation with the U.S.
This time was different. The communique explicitly stated China would move its target forward by 15 years, and called for major breakthroughs in core technologies. If China catches up with the U.S. on the economic front, it can look to surpass the U.S. in military capability. The Xi administration has pushed a "Military-Civil Fusion" strategy that enlists private companies to help with technological development. It also employs distinctive terms, like "prosperous country" and "strong military," as well as technological "self-reliance." It is no surprise that policies and statements like these would provoke the U.S., already wary of China's rise.
China has grown rapidly to become the world's second-largest economy thanks to the benefits of globalization, and five-year plans now seem like an outdated relic. In creating plans, leaders will be obliged to put forward difficult goals and achieve them. This prevents flexible and efficient economic management and creates warped incentives that lead to number-padding and other undesirable behaviors.
China's real growth rate from January to September was 0.7%. Although the economy is recovering, the negative impact of the coronavirus pandemic was significant. Xi has made a "dual cycle" development model, which calls for growing domestic demand and interaction with the external economy, a mainstay of his growth strategy. But if the confrontation with the U.S. drags on and China tilts too much toward relying on domestic demand, existing reforms and opening policies will be put in jeopardy.
The U.S. push to isolate Huawei and fragment China's supply chains is taking root in other Western countries and becoming a headwind for Chinese companies. Many people are losing work, particularly at small companies. Chinese leaders should prioritize economic support for these people who are in dire straits.