The coming years will be crucial for the Chinese economy and decisive for the realization of the „Chinese dream” of a prosperous society. This dream is to be achieved through the 13th Five-Year-Plan. This conglomerate of strategic goals will have a cascading effect; it will affect the global economy as well.

Many see the Five-Year-Plan (FYP) as a Stalinist holdover of China’s old command economy1; disregarding those „Guidelines” is a mistake. Investors should be fully aware of China’s five year economical cycles. China’s economic cycles are dictated by the elite of the Communist Party of China (CPC) and not by the invisible hand of the market.

China is run by the CPC whom does not see a free markets as a goal, but as a mean to improve the wealth of the citizens of China. The website of the CPC states the following ”The Communist Party of China takes Marxism-Leninism, Mao Zedong Thought, Deng Xiaoping Theory, the important thought of Three Represents and the Scientific Outlook on Development as its guide to action.”

To understand the importance of the FYP, one must understand exactly what it is.

What is the Five-Year-Plan?

The FYP is a nationwide, central policy planning tool2. In other words it is a social and economic development blueprint3, consisting of a list of targets/guidelines. It has been adopted in 1953 based on the economical model of the Soviet Union. It is drafted by the National Development and Reform Commission (NDRC – the agency controlling Chinese economy) and is implemented by central, provincial, local and district governments, in cooperation with industrial regulators3. The targets of the central FYP are established in consultation with relevant stakeholders, ministers and experts from various institutions.

After approval by China’s legislature, the National People’s Congress, each province, municipality and ministry has to develop its own FYP4. It induces a cascading or domino effect. The importance of this plan cannot be underestimated, as we have learned from former communist countries of East Europe, such plans were much-awaited, deeply analyzed and explained for the society and in the end the reported results were fabricated in order to meet the expectations of the ruling leadership.

Because China’s FYP is so important for the second-biggest economy in the world, it is also significant for the rest of the globe.

Initial draft of the 13th FYP (for years 2016-2020), is being discussed since April 2013, and will be presented end-October 2015 during the 5th plenum of China’s 18th Communist Party Congress5, the highest body of the party. Then it will be discussed by the group of national experts6 and a finalized plan should be approved in March 2016 by the National People Congress – the national parliamentary legislative body.

What is it about?

The 13th FYP will establish the policy framework for accomplishing key goals and reforms of President Xi Jinping’s administration. The new plan will not be radically different – it will probably be a continuation of the current FYP2 and of the policy priorities of the 3rd plenum in 20125. It will be a tool to meet long-term ambitious and national objectives, like the transitioning to a more developed economy and the doubling of GDP per capita by 2020 from the levels of 20002.

From press releases we can assume that the new guidelines are describing the following general trends:

entering a so-called „new normal” period of economic restructuring7, meaning slower but more sustainable, „medium-high rate” growth model8, led by consumption9, emphasizing quality of growth, instead of quantity2, emphasizing „population policies” over GDP1, protecting environment10 as a part of extended pro-social policies.

Similar to the former one, the new FYP will consist of probably two dozen policy targets – binding and non-binding ones. The most important point, just like before, will be the GDP growth target5, however some analysts do not exclude abandoning the annual growth target11. The majority of experts expects setting the annual GDP growth goal between 6.5-7% levels (for 11th Plan 2006-2010 this target was 7.5% of annual growth, for 12th Plan 2011-2015 – 7%). Our team will publish more anticipation soon.

* Final consumption expenditure annual growth in 2014 – lack of data

According to official statistics, most of the current FYP targets are yet to be achieved3. Most of the binding targets are related to resources, environment and livelihood sections, a decrease in energy consumption per unit of the GDP, a decrease in carbon dioxide emission per unit of the GDP and an overall enrollment rate in basic medical insurance5.

Why is it significant?

For non democratic regimes the symbolic aspect cannot be ignored. The 13th FYP is crucial, not only to develop a prosperous society, but also because of forthcoming centennial anniversary of the founding of the Communist Party of China (on 1. July 2021). For president Xi Jinping, realizing this Plan is a personal ambition – it is the first FYP in his term of office.

Due to China’s one child policy and dramatic demography, the 13th FYP is probably the last one12, in which China is the most populous country in the world. An increasing ageing population could shift China’s priority from economic growth to population growth.“ Population policies may be emphasized over the GDP for the first time ever.

Especially ordinary citizens will be affected by the new plan, due to a growing consumption and better environmental conditions. Underdeveloped areas in the west of China will be utilized as a source of cheap labor. Production will be moved to areas with the cheapest workforce.

The low-carbon sector will benefit from it, in contrary to large and outdated companies. Some significant repercussions will have a reform of state-owned enterprises11 and the steel sector13. This will affect the global economy. Lower the demand for foreign commodities and can even influence emerging markets. The shift from an economy that is driven by investments in construction to a developing economy based on domestic consumption will have a negative effect on the export of raw materials. It will at the same time be a chance for companies with end products for consumers, consumption services and environmental-friendly technologies.

References

1. China Said to Consider Policy Shift to Put Population Growth Before Economy Source: Bloomberg 20-08-2015

Facing a demographic time bomb that threatens China’s economic rise, President Xi Jinping is considering shifting his priority to population growth, according to a person familiar with the discussions.

2. NDRC Prepares for Next Five-Year Plan, Focuses on Quality over Quantity Source: The US-China Business Council 2015

China’s leading economic planning body recently announced it had begun the initial research phase for the 13th Five-Year Plan (FYP)—the key social and economic policy blueprint for the 2016-20 period.

3. Understanding China’s 13th Five-Year Plan Source: China Business Review 12-02-2015

China’s policymakers are starting to reveal details about the direction of the country’s next Five-Year Plan (FYP), the central government blueprint for China’s long-term social and economic policies.

4. Six reasons why the Five-Year Plan matters for your business Source: KPMG 2015

Understanding the implications of China’s Five-Year Plan is critical in cementing relationships with business partners and regulators.

5. Growth, Reform Central to Beijing’s Next 5-Year Plan Source: Barron’s 06-10-2015

The 5th plenum of China’s 18th Communist Party Congress is expected to take place in mid-October. The 13th five-year plan will be discussed then.

6. Step 6 – National Experts Committee discussed draft Source: Environmental Performance Index 2015

The National Experts Committee, selected by the State Council, included 37 experts in economics, science, industry and other fields. They convened with the NDRC to discuss the draft and submitted a report to the State Council and the NPC.

7. Taiwan should seek opportunities in China’s next five-year plan Source: Want China Times 30-04-2015

China’s 13th five-year development plan, which Beijing has been preparing since April 2014, is expected to become the basis of the country’s economic policy from 2016 to 2020 after it is rubber-stamped by the National People’s Congress next March.

8. Nation outlines goals for 13th Five-Year Plan Source: China Daily 21-07-2015

A bridge over the Yangtze River under construction in Wuhan, Hubei province. It will be the eighth Yangtze River bridge in the city and is evidence of ongoing infrastructure development.

9. China Focus: China’s five-year plan attracts global attention Source: Xinhuanet 11-09-2015

We may be half a year from its release but a government plan that will set the course for China’s economic and social development in the coming five years was a hot topic at the Summer Davos forum this week.

10. How the Next 5 Years Could Make or Break China’s ‘War on Pollution’ Source: The Diplomat 10-06-2015

China’s environment minister is hopeful that the next five year plan will include strong environmental targets.

11. Xi Hones China’s Next Economic Blueprint After Stock Turmoil Source: Bloomberg 23-07-2015

After assembling rescues of indebted local governments and a plunging stock market for much of the year, China’s leadership gets an opportunity to revive their narrative of economic reform at a gathering now set for October.

12. China’s economic growth plan: more babies please Source: MercatorNet 09-09-2015

In a couple of months China’s 13th five-year plan will be sent to Communist Party meetings for approval.

13. China to push steel sector consolidation under new plan Source: Ejinsight 18-09-2015

The 13th Five-Year Plan for China’s steel industry is scheduled for release by year-end.