This February, President Biden said in an interview that “there is going to be extreme competition” with China. On one hand, his statement reveals the “new normal” for the future of US-China relations as the two sides may have increasingly intense competition in technology areas and regional security; on the other, it signals that China has emerged as a serious rival to the United States.
On March 13, 2021, China’s 14th Five-Year Plan (FYP) was officially released. It not only establishes China’s national targets for the next five years, but also aims to form the cornerstone of China’s long-range targets of 2035—becoming a country with advanced technological innovation and income at a “moderate developed” level. To achieve such an ambition, China recognizes that it must evolve its developmental pattern and market vitality to the next stage; therefore, the 14th FYP is devoted to making breakthroughs in innovation capabilities, building more open and stable financial markets, advancing in green development, and strengthening the domestic consumer market.
Prioritizing technology innovation
The 14th FYP begins with prioritizing technology innovation. The plan mentions ensuring a 7% annual growth in research and design (R&D) spending to build self-reliance in technology, which is considered as the “strategic support” for the country’s development. Furthermore, it underscores the development of cutting-edge technology in “strategic new industries,” including artificial intelligence (AI), quantum information, integrated circuits (IC), life sciences, human health, brain sciences, breeding technology, space technology, and polar exploration. Innovations in transportation, energy, manufacturing, education, medical services, community development, government affairs, and even tourism are all covered as well.
It may sound impractical to include such a wide spectrum of industries, but China sees these actions as essential in order to free itself from what it sees as other countries’ constraints and become a self-sufficient country. Therefore, it is now devoting itself to solving the problem of technological “bottlenecks.” According to the World Intellectual Property Organization (WIPO), China, surpassing the US in 2019 in IP applications, remained the largest user of the Patent Cooperation Treaty (PCT) system in 2020 with annual growth of 16.1%—it was also the only country that maintained double-digit growth during the pandemic. If sorted by enterprise, Huawei would be the largest applicant for the fourth successive year, with most of its applications related to 5G technologies.
The situation is similar in Europe. According to the European Patent Office (EPO), whereas the number of applications from the US, German, and Japan—the top three applicant countries—all dropped in 2020, China rose by 10%. On one hand, these numbers show that China fully realizes the importance of patent rights, which is also why Huawei’s outstanding achievement in 5G technology raises pervasive concerns of a Chinese monopoly among many countries; on the other hand, they demonstrate the resources China is investing in technological innovation and its determination to outpace the development of other advanced countries.
Although China faces issues of rising wages and outward-transferring of industries, its dedication to upgrade manufacturing remains unwavering. The 14th FYP continues to focus on improving manufacturing quality, encourages the establishment of China’s own brands, and embeds AI and digitization into the manufacturing process. Even though China’s comparative advantage in low labor cost is quickly diminishing, its capabilities in automation improves every year and it has now become the biggest robot market in the world. Supporting the industry’s further development, just recently, in late March, China announced the launch of new AI manufacturing pilot programs in the cities of Suzhou and Changsha.
As for industries related to China’s strategic goals, the 14th FYP addresses multiple incentives policies which encourage enterprises to increase their investment into R&D. These include: tax deductions for research investment, preferential taxation for tech-focused small and medium-sized enterprises, insurance coverage or subsidies for major technology development, and various enhancements for cultivating domestic talent and attracting international experts. Meanwhile, the plan aims to increase the ratio of investment spending in strategic industries to GDP to 17%, which China also plans to establish four national science research centers in Beijing, Shanghai, Anhui, and the Greater Bay Area (GBA) to support the country’s innovation in advanced technologies.
A more open and regulated financial market
Another clear priority established in the 14th FYP is making China’s financial market more stable and open, especially in relation to attracting foreign capital. Since the new Foreign Investment Law passed in March 2019, China has gradually removed the equity ratio limit for foreign capitals on its banks, securities, insurance, and fund management industries. The 14th FYP further emphasizes establishing a modern central bank system and internationalizing the RMB to establish more regularity and stability for the Chinese currency. On March 12, 2021, the People’s Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) announced that they would be launching pilot programs of integrated fund pools of RMB and foreign currencies in Shenzhen and Beijing, which would allow international companies to transfer money from their domestic funds freely. This move could be a great attraction for foreign capital as a closed current account and restricted foreign exchange remains a main dissuasion for foreign companies to launch businesses in China; meanwhile, it also strengthens Chinese MNCs’ capability to expand their foreign influence.
Fiscal and taxation policies are also frequently mentioned in the plan as an important tool to stimulate the economy. Instances for these policies include encouraging financial support for micro and small enterprises and agricultural sectors, lowering loan barriers for private enterprises, and using tariffs or tax deductions to expand foreign trade and encourage investment in R&D. These policies could considerably lower costs for foreign manufacturers and allow China to acquire the key resources or technologies necessary to advance strategic industries on its path to self-reliance.
Another notable emphasis is its “zero tolerance” policy against financial irregularities, such as strengthening the supervision on financial institutions and banking products, optimizing bond markets, and strengthening management on cross-border RMB trading. Chinese regulators have placed an increasingly severe emphasis on addressing potential systematic financial risks to shore up any potential undermining of the country’s economic progress. To drive the point home for market players, the China Securities Regulatory Commission (CSRC) had issued 27 administrative punishments by the middle of March 2021, including 13 for insider trading and illegal disclosure.
China’s peak carbon action plan
Climate change and environmental protection is another highlight featured in the new FYP. Last year, Xi Jinping announced that China would achieve peak carbon emissions by 2030 and carbon neutrality by 2060. The 14th FYP confirms an action plan for the 2030 goal, which will increase the role of non-fossil fuels in total energy consumption to 20% (in context, the US achieved this goal in 2019). China’s installed capacity of renewable energy is already the largest in the world, and continues to grow rapidly with each passing year. In addition, the plan reaffirms China’s commitment to international climate change frameworks (the UNFCCC and Paris Agreement) and international cooperation, such as the Africa-South America Summit (ASA).
Carbon-emissions trading is also proposed by the plan as a critical move for China to come in line with advanced international standards. After years of pilot experiments, China’s national carbon-emission trading market will be launched formally in mid-2021. China’s first batch of carbon-neutrality-themed green bonds that faced global investors was also issued on March 18 of this year. According to global financial data provider Refinitiv, China issued US$15.7 billion of green bonds in the first quarter of 2021, an amount four times larger than last year. By comparison, the US issued US$15.0 billion in the first quarter and grew three times from last year’s totals. China’s rapid progress indicates its intention to become a leading country for climate change and places it at the forefront of global climate change management.
The dual circulation economy
“Dual circulation,” an initiative composed of an internal band that prioritizes domestic consumption and an external band for promoting international trade, is an important emerging economic policy announced last May. The essence behind it is to expand the domestic market by strengthening international outbound trade. The 14th FYP, therefore, especially underscores the optimization of the domestic market, such as improving product quality, enhancing market supervision, and promoting e-commerce and logistics services.
For external circulation, besides strengthening China’s exports, the 14th FYP also intends to attract more foreign capital and trade through preferential tax policies and simplifying administrative procedures. In addition, on March 22, China ratified the Regional Comprehensive Economic Partnership (RCEP) ahead of the other 14 member countries, which will take effect as of January 2022. The super trade bloc formed by the RCEP will benefit China’s external circulation significantly. Moreover, it allows China to advance its economic influence in the Indo-Pacific region—poignantly ascending it to become the most influential country after the US dropped from the Trans-Pacific Partnership (TPP, now CPTPP) in 2017 and has no involvement in RCEP.
The above policies indicate that China’s next five-year blueprint prioritizes its domestic issues, albeit with important implications for its capacity to compete with the United States and other rivals. China continues to focus on its economic transformation, through which it hopes to not only maintain its strength as a manufacturing giant but also become a self-sufficient country that leads in global technology innovation. Without a doubt, the FYP lays out a beautiful vision, though it remains to be seen whether it can be fulfilled.
A notable emphasis of the 14th FYP is the “stronger, better, and bigger” (zuòqiáng, zuòyōu, zuòdà) approach for state-owned enterprises (SOEs). Although many reforms to enhance competitiveness and supervision are noted, Beijing’s expectations are still to let SOEs lead the country’s economic development both at home and abroad while carrying the responsibility of strategic security. It will be crucial to follow how enterprises in a highly politicized environment will be competitive in cultivating innovation, maintaining high standards of efficient operations, and preventing corruption.
Recently, China has been using its antitrust law to ensure private companies fall under regulators’ vigilant gaze. Starting with Alibaba, other Chinese internet giants, such as Tencent and Baidu, are now also on SAFE’s shortlist. To be certain, antitrust is a core component of a healthy market, yet look no further than China’s four major banks (ICBC, ABC, BOC, and CCB), which have remained the top four largest banks across both domestic China and abroad. These banks and many other SOE-dominated industry examples within the market suggest that Beijing’s priority to protect SOEs still comes before creating a competitive market through regulation. This contradiction between strengthening state leadership and promoting the private economy may limit China’s ability to innovate, making it more difficult to break through its technological “bottleneck” issues.
The implication to US-China relations
Suppose the 14th FYP is fully realized as planned. In that case, China is highly likely to become a qualified competitor of the US in the short-term while potentially surpassing the US in key technology areas over the long run. However, China still faces various types of domestic dilemmas, many of which are not addressed by the five-year plan. Comprehensive economic and political reforms are required, but top policymakers are unlikely to take such a step. In other words, the US still boasts plenty of advantages with which to compete with China under the status quo until Beijing can identify a unique approach—as it frequently has—to overcome structural obstacles it encounters without fundamental reform.
However, to maintain competitiveness going forward, the US must prioritize repairing its industrialization capabilities after widespread offshoring efforts weakened its industrial infrastructure and manufacturing capabilities. American companies and politicians must also consolidate the US’ leading status in cutting-edge technology development and build reliable supply chains with traditional allies. For instance, as warned by a recent report of Council on Foreign Relations (CFR), US inaction would only benefit Chinese expansion in the international domain through the Belt and Road Initiative (BRI); the US should seize its chance to develop a Western alternative to BRI—particularly as some BRI member countries have become attune to the potential risks of participation. Otherwise, China will continue to strengthen within the realm of US-China strategic competition while the opportunity for the US to maintain its traditional role in global leadership diminishes.