Although China’s pandemic control and economic recovery are impressive, the damage caused by the COVID-19 is severe, especially the widening of the wealth gap. Laying out a national vision for the coming years is important to boost confidence and social cohesion.
While the official draft of the 14th FYP will be submitted to the National People’s Congress for review in March 2021, the post-plenum communique and President Xi Jinping’s 14th FYP Explanation expound the rationales for the direction of future policy. China’s 2035 vision gears up general policy goals from the previous ‘building a well-off society’ (to be achieved by 2021) to ‘building a modern socialist nation’.
In the context of nation building, proposed policies should be understood as aiming to strengthen the underpinnings of a modern nation’s long-term sustainable growth. Although consistent with the 13th FYP in many areas, the 14th FYP is more ambitious and seeks to tackle issues with greater force.
The 14th FYP ramps up measures from the 13th FYP that address two major challenges facing the Chinese economy. First, technology competition between China and other technologically advanced economies has escalated, and international willingness to allow technology diffusion to China has significantly declined. For any country, technological progress can come from two sources: domestic innovation and absorption of technology diffusion from abroad.
As technology diffusion opportunities wane, China will need to rely more on domestic innovation to sustain its technological progress. Even without a deliberate slowdown in technology diffusion by advanced countries, China would need to boost domestic innovation because room for technological catch-up shrinks as it moves closer towards the global technology frontier.
Second, external demand is uncertain due to US–China trade tensions and the consequent downturn in income growth. There is also now an increased desire for more localised production to strengthen supply security in major export destination countries as the COVID-19 pandemic continues. China needs to bolster domestic demand to hedge against the risk that external demand loses further steam.
To address the first challenge of technology competition and independence, the 14th FYP places innovation as the core force driving China’s modernisation, with technological independence and self-reliance supporting development.
Although the 14th FYP continues to emphasise that firms are the main innovators, there is now a greater focus on a national strategic technology capability. This is to be achieved through a nationwide system for developing key technologies and basic research for original innovation, as well as a supply system of common basic technologies. Forward-looking and strategic national science and technology projects will target frontier areas including artificial intelligence, quantum information and integrated circuits.
Government policies will play a more active role in enhancing innovation capabilities, especially basic research, which is without a clear purpose, distant from commercialisation, highly risky and therefore under-invested in by private firms. Leading innovative economies like the United States have strong national innovation systems and institutional designs that underly an innovation chain from basic research without a clear purpose, to research with a clear application, to experimental development research for commercialisation. China’s 14th FYP prioritises the building of its own innovation chain that sustains continuous innovation and technological progress.
China has invested heavily in research and development (R&D). According to the OECD, in 2018 China’s aggregate R&D expenditure was US$463 billion (measured in constant prices with base-year 2010 and purchasing power parities), second only to the United States’ US$552 billion. China’s R&D intensity — gross expenditure on R&D as a percentage of GDP — was 2.1 per cent, lower than high-income countries’ average of 2.4 per cent and higher than middle-income countries’ 1.7 per cent.
A closer look at the R&D expenditure structure based on OECD data reveals that in 2018, basic research accounted for 5.5 per cent of total R&D expenditure in China, while applied research was 11.1 per cent and experimental development was 83.3 per cent. The corresponding percentages in the United States were 16.6, 19.8 and 63.4 per cent — a significantly higher percentage for basic research.
As tensions in technology competition rise, China will need to rely more on domestic basic research. President Xi has emphasised the importance of basic research in several recent talks and we should expect to see a rise in China’s basic research expenditure. Failure rates of basic research are high, so learning from predecessors’ experiences will be helpful for avoiding a downturn in research productivity.
The dual circulation strategy tackles the second challenge. Internal circulation focusses on domestic economic development to create a strong domestic market and a powerful trading nation, which in turn attracts global factors of production. The latter is the external circulation. Exports and imports, and inward and outward foreign direct investment, are encouraged to balance each other out. By boosting domestic consumption and investment, the domestic market will grow.
This does not mean that China will start facing inward. Instead, Beijing aims to build a strong home market that could serve as the locomotive for greater-scale and new market openness.
External circulation includes international trade, financial and people flows. These flows bring new technologies and ideas, which become even more important given increased restrictions on technology transfers by other leading technology countries. It is now ever more important for China to sustain and enlarge open markets.
Yixiao Zhou is a senior lecturer at the Arndt-Corden Department of Economics, the Crawford School of Public Policy, the Australian National University.