This strategy will be embedded in China’s 14th Five-Year Plan (2021–2025) and 2021–2035 Medium-Term Development Goals (the ‘2035 Goals’). Both documents will be finalised and endorsed by China’s top legislative body, the National People’s Congress, in early 2021. It will be the first time in several decades that the central government does not specify a target rate of GDP growth for the next five years.

The Communique of the Fifth Plenum sets the blueprint for the 14th Five-Year Plan as well as the 2035 Goals. While the policy details are not available yet, several areas are particularly notable. Innovation is the foremost focus of these policies and regarded as the central driver of economic development in the coming decades. This policy is determined by both international geopolitics and China’s domestic reality.

Internationally, China has undergone decades of learning and catch-up with advanced countries. This opportunity is now fading as technological gaps with advanced economies narrow, exacerbated by the Trump administration’s technological ban and trade war. Domestically, rising labour costs and an ageing population require China to make technological advancements to maintain competitiveness and sustain economic growth. China must invest more to boost indigenous innovation. To achieve this goal, further reforms must focus on strengthening intellectual property protection and promoting private sector participation, including foreign investment in innovation.

China’s per capita GDP was just above US$10,000 in 2019. It spent about 2.19 per cent of GDP on research and development (R&D intensity). At a similar level of income, Japan and South Korea spent much less on innovation. Japan’s R&D intensity reached 2.19 per cent in 1980 when the country’s per capita income was three times as high as China’s current income. South Korea achieved that level in 2000 when per capita income was twice as high as China’s current income.

In terms of total R&D spending, China is rapidly narrowing its gap with the United States, and will become the world’s largest R&D investor by 2025. But on a per capita basis, China is still decades behind the United States.

Associated with the focus of technological self-reliance is an emphasis on domestic markets through the adoption of a ‘dual circulation’ development model. This model will maintain China’s open-door policy (the ‘external circulation’) while reinforcing the role of domestic demand in economic growth (the ‘internal circulation’). The international market has played a key role in China’s growth over the past four decades. During its heyday before the global financial crisis, the total value of exports and imports on average accounted for 62 per cent of China’s GDP. But the expanding size of China’s economy renders the existing structure outdated and leads to systemic distortions.

The ‘dual circulation’ model indicates a major policy shift from the focus on export demand in the past to the promotion of domestic consumption-oriented growth drivers. This change should not just be a short-term response to world economic recession and falling external demand. Rather it should be an important step for restructuring the Chinese economy and balancing international engagement with the domestic purchasing power of 1.4 billion consumers in an upper-middle income society.

Restructuring has already occurred in recent years. In 2019, the total value of exports and imports fell to 36 per cent of GDP. This figure is parallel with Japan and well below Germany (88 per cent), though it is still above the United States (26 per cent). The policy shift is unavoidable and has been accelerated due to the COVID-19 pandemic. To further tap into domestic consumer power, reforms should focus on narrowing the gaps between rural and urban income and removing barriers to rural-urban migration such as the household registration (hukou) system.

Another area for reform is environmental protection and climate change policy. During President Xi Jinping’s speech to the UN General Assembly on 22 September, four weeks before the Fifth Plenum, he surprisingly announced China’s goals of having carbon emissions peak before 2030 and reaching carbon neutrality by 2060. Achieving these goals will require major structural changes and deepening reforms in the Chinese economy. These reforms should aim to remove barriers to renewable energy growth, green production, and low carbon consumption and living. They should also promote energy use efficiency and the development of carbon capture and storage technology.

At the Copenhagen Climate Change Conference in 2010, the Chinese government pledged that the country’s emissions intensity (carbon emissions over GDP) would fall by 40–45 per cent relative to the 2005 level by 2020. At the end of 2019, China successfully delivered this target and managed to reduce emission intensity by 48 per cent. If the government is fully committed to meet the goal of carbon neutrality, China has a good chance to deliver it. That will be an important milestone for global climate action.

Yanrui Wu is Professor of Economics at the University of Western Australia Business School.