China’s Past… China’s Future...

China’s growth has been remarkable, since its market opening and reform programs back in the 70’s. China’s 14th Five Year Plan (14FYP) –((新华社), 2021) – reference at the end, released in March 12, 2021, focus on auto-sufficiency and increasingly nationalization, casting doubts over the country’s future growth trajectory. Their overall principle is to seek progress while maintaining stability. Their ambition is ?to cement China as a global economic superpower… like in the 1800’s , when China was the largest economy, and it was not relying on other markets.

Since 1953, and every 5 years, the Chinese Communist Party (CCP) issues a series of Economic and Social development initiatives, setting growth targets and launching reforms. China's Five-Year Plans have been praised for their efficiency, capabilities and their importance to rapid economic growth, and development. It is an amazing example of solid planning and execution.

The process of drawing up the five-year plans has six basic phases (figure 1 below). First, research is conducted to better understand the socioeconomic needs of the country. Second, ideas are brainstormed for possible avenues to address these needs. Third, plans addressing individual needs are formulated based on the most viable ideas. Fourth, individual plans targeting various issues are formed together as a whole for synergy and consistency. Fifth, a preliminary five-year plan is tested with various industry professionals in different fields for effectiveness and feasibility. Lastly, a revised proposed plan is submitted to the People’s Congress for official approval.

But how is China driving their path to self-sufficiency? China is using their SOEs (State-Owned Enterprises) and several mechanisms such as their dual circulation theory, its A&C (Autonomous & Controllable) guidelines to prioritize local technologies, its CM 2025 (China Manufacturing plan) to focus on fostering local knowledge and production of strategic items such as semiconductors, and its CSCS (Corporate Social Credit System) to steer the market behavior across industries. That way China can have higher control over the economy, and fulfill their ambition to be the largest economy in the world, without relying on any other country (figure 2).

And what are the potential consequences for China? ?There may be high costs of pursuing self-sufficiency: their focus on SOE’s and increasing barriers to foreign companies can deteriorate China’s innovation ecosystem affecting its long term competitiveness and its internal market strength, causing the exit of foreign companies and reducing the interest from external investors; Besides that, this can also compromise?its carbon emission targets, compromising (even more) the climate impact. ?Is China ready to surrender potential quality growth, the world’s and its own environment, ?for the objective of political control over the economy? This is something we will observe in the next few years.

But what does this mean for the rest of the world – e.g. for the EU companies operating in China? Within this scenario, EU companies can be pushed away, or they may require to focus on localization of technologies and disconnection from certain global systems, in order to survive – depending on which sectors China is prioritizing its nationalization; China clearly has their priorities: a list of welcome companies, the good ones to onshore and the list of unwelcome companies – this list is based on their self-sufficiency plan – and it is a solid one.

How is USA playing this game? ?USA moves during recent years – under Trump’s government and also under Biden’s administration, has accelerated China’s movement into the self-sufficiency as they posed a clear threat into China’s strategic growth plan; The truth is that USA and China are both trying to set the (technology) standards for the rest of the world, in order to consolidate their economic leadership.

?And what EU is doing? EU Chamber of Commerce has built a list of 930 recommendations (Commerce, 2021) – reference at the end, to China, EU countries and EU companies. The purpose of these recommendations is to promote a constructive dialogue to push a continued improvement in business cooperation between Europe and China, as they believe this is the best approach for both. EU Chamber of Commerce, and the majority of its members, is basically recommending China to back-off on their self-sufficiency plan, return to their original market opening mindset, and sit on the table with EU governments and companies to evaluate the best way moving forward.?

On top of that, the European answer to China and to the whole world is the new green deal. EU’s Carbon Border Adjustment Tax is posing a new protectionist scheme into effect.

Evaluation under this scenario: We need to understand China’s point of view and projections in order to better judge the probability of their moves, and for the EU governments and companies to act properly.

There are 2 interesting articles (references at the end) written by Justin Yifu Lin?(Chinese: 林毅夫, born on October 15, 1952) he is a Chinese economist and professor of economics at Peking University. He served as the Chief Economist and Senior Vice President of the World Bank from 2008 to 2012, and he has been appointed as China State Council Counsellor since September 2013.

In Justin’s first article (Lin, China and the Global Economy, 2011) he talks about China’s prospects post 2008/2009 crisis. He describes China’s dramatic structural transformation and remarkable growth since its reform and opening in 1979, and the contrast with the depressing performance of other transitional economies in eastern Europe and the former Soviet Union. It is interesting to see his point of view about China’s advantage of backwardness in its pursuit of technological innovation and structural transformation – if we look from China’s eyes, this is the right thing to do.

In the other Justin’s article (Lin, China’s economic outlook against the backdrop of the COVID-19 pandemic and US-China tensions, 2020) Justin describes how China has been tested by COVID-19 and by the US-China tensions – according to him, as long as China stays calm, pursues smart, forwardlooking policies with continuous reform and opening up, taps into its potential, and maintains stability, China will continue to grow dynamically.

At the end of the day… the facts and all China’s official plans and guidelines (14FYI, A&C, CM2025) clearly show that China is moving towards self-sufficiency, protecting their SOEs, and moving to set the technological standards for the rest of the world. EU Chamber’s recommendations make sense. However, for EU it is imperative to discuss clear and immediate actions to set its position – in front of both USA and China –so EU companies can adjust their strategic plan accordingly – as it is today, paradoxically there is maybe more unpredictability on how EU will position itself than China or USA.

References

(新华社), X. N. (2021). Outline of the People's Republic of China 14th Five-Year Plan for National Economic and Social Development and Long-Range Objectives for 2035. Beijing: Xinhua News Agency (新华社). Xinhua is China's official state-run press agency. Link:

Commerce, E. U. (2021). European Business in China - Position Paper. Shanghai: European Union Chamber of Commerce. Link:

Lin, J. Y. (2011). China and the Global Economy. China Economic Development Forum (pp. 1 - 17). Hong Kong: China Economic Development Forum. Link:

Lin, J. Y. (2020). China’s economic outlook against the backdrop of the COVID-19 pandemic and US-China tensions. Journal of Chinese Economic and Business Studies, 6. Link: