Abstract: In this article, the author explains the key points of the 14th Five-Year Plan to help readers understand what the Plan has proposed in terms of demand-side management, how to build the new development pattern, how to balance between growth and risk prevention, and how to improve the financial system to better serve the real economy.
I. The 14th Five-Year Plan addresses five relationships
First, inheritance and innovation. The 14th Five-Year Plan features both inheritance from the 13th Five-Year Plan and innovation.
Second, market and government. For the first time, the 14th Five-Year Plan pledges to forge better coordination between an effective market and a proactive government, which reflects years’ efforts to accurately understand the relationship between market and government. In the process of developing a market economy, China needs to value its institutional advantages of socialism with Chinese features.
Third, opening-up and independent development. It is essential to coordinate the domestic and international markets.
Fourth, security and development. Security is the prerequisite for development, while the latter guarantees the former. It’s a must to ensure that China won’t be subject to systemic risks that will impede the country’s modernization process.
Fifth, strategy and tactics. The 14th Five-Year Plan proposes grand forward-looking goals as well as specific measures.
The 14th Five-Year Plan has seven strategic points.
First, take building a new development pattern as the general framework.
Second, take promoting high-quality development as the main theme.
Third, take deepening supply-side structural reforms as the main line, while also laying emphasis on demand-side management.
To build a new development pattern, emphasis should be laid on both the transformation and upgrading of supply and the expansion of domestic demand and consumption. Looking at the economic recovery in 2020, one may find that production has recovered better than demand, large enterprises than small and micro enterprises, and southern regions than northern regions. The gap between the south and the north has widened, and the center of economic development has begun to shift south, as measured by population movement, GDP growth, financial situations, and technological R&D, leading to increasingly uneven regional development.
During the pandemic, the rich spent less and saved more, while the poor suffered job and income losses, a phenomenon seen in many countries. Therefore, the rich were able to recover faster and better than the poor. This imbalance does exist.
In China, a lot of wealth has been created over the years. However, the proportion of household consumption in total disposable income has been declining, and the gap between the rich and the poor has widened. These imbalances show that the demand side has become a weak link, and the problem of oversupply has emerged. Therefore, demand-side management has become a focus point of the 14th Five-Year Plan.
In addition to consumption, demand-side management also involves boosting investment. Although it is necessary to expand investment, excessive reliance on credit expansion does not produce good yields. In particular, most of the infrastructure is constructed for public welfare. Such projects normally do not generate enough cash flows, causing weakened solvency of the investors and reduced driving force for GDP growth. Therefore, it is necessary to change the previous investment-driven model which relies heavily on debt, devote more efforts to utilizing idle capital, improving investment efficiency, and expanding investment scopes. Reforming the old thinking and old models of investment is an important part of demand-side management.
Fourth, take technology independence as the foundation. China should place innovation at the core of its modernization efforts, and take scientific and technological independence as strategic support for national development.
Fifth, take the development of the real economy as the focal point. China should unswervingly build itself into a manufacturing powerhouse, a quality powerhouse, a cyber powerhouse, a digital powerhouse, and a transportation powerhouse. It should promote balanced development of finance, real estate and the real economy.
Sixth, take the expansion of domestic demand as a strategic basis. China should take satisfying domestic demand as the starting point and goal of development, speed up the formation of a complete domestic demand system, and improve policy support for expanding domestic demand. Demand should drive supply, and innovation-driven high-quality supply could create new demand. Efforts should be made to promote broad-based consumption and expand investment so as to cultivate more new growth points.
Seventh, focus on managing China’s own affairs well. In view of the current complex international situation, China should focus on its own affairs and handle them well.
II. China needs to tap the potential of its super large market
Circular economy, originated from environmental economics, now extends to the field of macroeconomics, mainly involving production, distribution, circulation, consumption and the flow of various factors. In the history of economic development, there are two types of growth models: one is outward-looking and export-oriented, and the other is inward-looking featuring import substitution. In 1987, China proposed the development strategy of an international circulation featuring processing trade, that is, importing raw materials from abroad and exporting finished products. In 2006, China released the 11th Five-Year Plan which stated that "China should take expansion of domestic demand, especially consumer demand, as the basic foothold, and transform from an economic growth model that mainly relies on investment and exports to one that is driven by consumption and investment, domestic demand and external demand."
Since the launch of reform and opening-up, processing trade has played a great role in promoting China’s economic development, but the shortcomings also gradually became evident. Development of core technologies is subject to foreign controls. After 40 years of rapid growth, China now needs to shift to seek high-quality development. Coupled with the escalation of the tensions between China and the United States and changes in the international environment, a new development pattern of ‘dual circulation under which domestic and international markets boost each other with domestic circulation as the mainstay" has naturally emerged. This is an important strategic choice made by the Chinese government, and implies profound institutional reform.
The fact is China can rely on domestic demand for development. China has an ultra-large market. The domestic demand for investment and consumption has huge potential which has not been fully tapped. To realize the potential, China has to accelerate its pace in deepening reform, promoting opening-up and removing institutional barriers.
China now has a population of 1.4 billion people which will continue to increase. In the past, there were more than 20 million newborns in the country each year. In recent years, the number decreased to around 13 million. However, the total population is still on the rise, and China can still benefit from the demographic dividend. Especially by 2030, there will be 600 million people born in the 1980s and 400 million in the 1990s, who in general enjoy a higher level of education. These are the potential advantages of the ultra-large market.
We must apply new thinking to the expansion of domestic demand. The traditional demand-side approach highlights substitution - when external demand is weak, expanding domestic demand is the substitution. However, the new demand-side approach stresses mutual promotion of demand and supply, and the necessity to strengthen the basic role of consumption. To expand traditional consumption, cultivate new types of consumption, and promote service consumption, China must improve the quality of domestic supply, fully engage in international competition, improve efficiency of resource utilization, encourage innovation in supply, and better adapt to changes in demand.
III. Focus on the long-term balance between stabilizing growth and preventing risks
To build a new development pattern, China needs to formulate a policy framework for cross-cycle adjustment, and stress the long-term balance between stabilizing growth and risk prevention.
Counter-cyclical adjustment is mainly aimed at short-term situations, focusing on solving current problems; while cross-cyclical adjustment is aimed to solve the medium- and long-term problems, especially structural ones. How to establish a cross-cycle policy framework and what tools are available are issues that require in-depth research.
In view of China’s long-term economic development trend, stabilizing growth and preventing risks are equally important. Since the beginning of 2020, China’s macro leverage ratio has risen by nearly 30 percentage points, from 241% at the end of 2019 to 270%. The leverage ratios of government, corporate and household sectors have all been going up, which is bound to pose risks to the future. Therefore, stabilizing growth and preventing risks is not a problem for the next one or two years. It is a tough and long-term mission. We must strive to maintain a long-term balance between the two tasks.
How to measure high-quality development? There are macro indicators such as per capita GDP, national labor productivity, business environment, proportion of manufacturing value-added, and macro leverage ratio. Some of these indicators are doing well, and some are difficult to improve. But I believe that with the implementation of the 14th Five-Year Plan, per capita GDP can reach US$12,000 under a constant exchange rate, and China will join the rank of high-income countries.
IV. Enhance financial inclusiveness and build an institutional mechanism where finance can effectively support the real economy
The 14th Five-Year Plan lays out eight financial tasks.
First, establish a modern central bank system, improve money supply management mechanisms, and refine the market-based interest rate formation and transmission mechanism.
Second, build an institutional mechanism where finance can effectively support the real economy, advance the development of Fintech , and enhance financial inclusiveness.
Third, deepen the reform of state-owned commercial banks, support sustainable and healthy development of small and medium banks and rural credit cooperatives, reform and and optimize policy finance.
Fourth, strengthen the role of capital markets as hub of the economy, fully adopt the registration-based IPO and delisting systems, and increase the proportion of direct financing.
Fifth, promote two-way financial opening, steadily and prudently promote the internationalization of the RMB.
Sixth, improve the financial regulatory system, strengthen institutional infrastructure, increase the transparency and enhance rule of law in financial supervision, improve the deposit insurance system.
Seventh, unswervingly" crackdown on financial irregularities and illegal behaviors, and impose "zero tolerance" for violations of laws and regulations.
Eighth, prevent and resolve financial risks, resolutely maintain financial stability, and firmly safeguarding the bottom line of avoiding systemic financial risks.
To build an institutional mechanism where finance can effectively support the real economy –
Firstly, China must implement the new concept of economic development and achieve scale, efficiency, and quality; streamlining the capital chain and service chain through further innovation chain and upgrade of supply chains, actively support advanced manufacturing industries and innovation-driven high-tech industries, optimize the credit lending structure and provide diversified services.
Secondly, improve the money supply management mechanism, keep liquidity reasonably abundant, improve structural monetary policy tools, enhance transmission mechanisms, and effectively guide financial institutions to provide targeted services for the real economy and support the weak links in economic development.
Thirdly, build a long-term mechanism where finance can better support small and micro enterprises and private businesses, develop a new-type bank-enterprise relationship, improve risk management, and raise the level of Fintech.
Finally, vigorously promote green finance, enhance environmental risk assessment which should be incorporated into the business decision-making process of financial institutions so that they can play a better role in selecting and supporting environment-friendly enterprises and contribute to sustainable development.
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