October 2020
On October 26th-29th, the Central Committee of the Communist Party of China convened to discuss China’s 14th Five Year Plan (2021-2025). The Five-Year Plan is China’s top-down policy roadmap, setting specific economic and social goals for the country for the next five years. The government has rigorously followed and implemented these plans based on its track record. The last plan (13th Five-Year Plan) has been largely fulfilled and aimed to develop China into an "increasingly wealthy society" by 2021. Overall, GDP growth targets of 6.5% were met and disposable income doubled. China, by end of the year 2020, will constitute nearly 30% of global economic growth.
The new 14th Five Year Plan aims to create a "modern socialist country that is prosperous, culturally progressive and harmonious". While details of the plan will be submitted to the National People's Congress for approval next March, five major topics were discussed:
1. Quality Growth
While the new plan does not state a specific GDP growth target like previous plans, it emphasized that China’s GDP per capita should match the levels in moderately developed countries by 2035. There is a focus on “high-quality” development rather than high-speed growth.
2. Dual Circulation
The dual circulation is a two-pronged development strategy focused on both domestic and international growth. The first cycle focuses on domestic consumption as a key growth driver and aims for self-sufficiency. In essence, invest “in China, for China”.
The second cycle aims at further integration in the global technology, logistics and financial system. China will continue to advance the Belt and Road to promote trade. It will also liberalize investment by further opening up the capital market and take steps to position the RMB as reserve currency for the central banks.
3. Technological independence and innovation
China's dependence on semiconductors, operating systems and modern robot systems from overseas became particularly apparent during the Huawei crisis. These technological gaps are powerfully addressed in the 14th FYP with new objectives for IP protection and investments in R&D and education. The government will double down on funding the semiconductor industry, which underpins frontier technologies like AI, 5G and quantum computing. It will also invest in renewable energy, biotechnology and aeronautical science.
4. Urbanization 2.0
China has selected five city clusters which account for 64% of GDP and 54% of the population. A dense network of high-speed trains (35,000 additional route kilometers), area-wide 5G networks, ultra-high voltage networks, infrastructure for electric and hydrogen vehicles, AI and the industrial Internet of Things are being built in these city clusters. The perfect smart cities on a large scale.
5. Green Economy as a Long-Term Goal
Today China has the largest carbon footprint globally, accounting for nearly 30% of the world’s carbon emissions. On the other hand, the country has reduced its dependence on coal consumption from 70% to 58%. Renewable energies will be increased from 15% to 25% in the next 5 years. Although CO2 emissions will increase by 2030, the next five-year plan pledges China to be CO2 neutral in 2060. While there is still a long way to go, it is reassuring to see that China defines green energy as one of the main thrusts of the Five-Year Plan.
What does that mean now?
China is preparing for a world made up of two hemispheres, one American and one Chinese. In doing so, it first tries to strengthen itself as a country, to become technologically independent, to build up the perfect infrastructure and to address the issue of environmental protection while maintaining consumption-driven growth.
Internationally, China becomes the leading economic nation and paves the way for the free capital market and the RMB as a freely convertible world currency. The takeaway for investors is that China will become an increasingly dominant global power and an increasingly important part of an investment portfolio.
Technological innovation will become a priority for the government, particularly in frontier technologies (e.g., AI, robotics, etc.) and tech bottlenecks (i.e., semiconductors). Investors should watch this space carefully; significant growth in these technology sectors can be expected with domestic companies developing into global leaders going forward.
The government is also experimenting with additional market reforms. On October 11th, the Chinese government announced the “Shenzhen Special Economic Zone 2.0” as a model for the new future China. In essence, this includes:
Creation of an international hub like Hong Kong, by offering attractive jobs with low taxes, modern health and pension system to entice the world's top talent.
Establishment of a world-class capital market using New York as an example with easy IPO registration, RMB convertibility, creation of a digital crypto currency, opening up to international funds and investment banks, and protection of private data.
Development of an innovation hub based on the Silicon Valley model, through IP protection, opening of investment opportunities for foreigners in leading technologies.
Qilin Capital will actively identify investment candidates benefiting from the 14th Five Year Plan and adjust its portfolio accordingly.