10 February 2021
There would be very few Australian business people who are not aware of the current chill in political relations between Australia and China. In fact, COVID-19 has accelerated geopolitical and economic forces that are driving change in China’s relationships across the world. People movements have been restricted and global trade and investment have slowed sharply. But, it’s not all doom and gloom.
China’s economy, the world’s second-largest, grew 0.7 per cent in the first nine months of 2020 from a year earlier, while third-quarter 2020 GDP was up 4.9 per cent year-on-year. Whereas China’s GDP growth for 2020 is likely to have been around 2 per cent, the rest of the Asia Pacific region is understood to have contracted by around 3.5 per cent. Prospects for the region are brighter in 2021, with growth expected to be 7.9 per cent in China and 5.1 per cent in the rest of the region, based on the assumption of continued recovery and normalisation of activity in major economies, linked to the successful rollout of COVID-19 vaccines.
China was ranked 31st in the World Bank Group’s Doing Business 2020 Report, up from 46th in 2019 and 78th in 2017 (Australia was 14th in 2020). China has also recently undertaken significant reforms in the areas of market access, regulatory structure, tax collection, IP protection and the processing of governmental approvals and licences.
The point is that for Australian businesses doing business in and with China, there is still blue sky ahead. It is important for these businesses to understand key policy developments in China and their impact. In this article, we briefly consider two key policy developments in China – the 14th Five-Year Plan (14th FYP) covering 2021 to 2025 and China’s economic goals through to 2035.
China’s 14th FYP
The 14th FYP, a proposal which the Communist Party of China adopted in late October 2020, will most likely be released by the Chinese government in the first quarter of 2021. It will set out the Chinese government’s overarching strategy and targets for economic and social development during the next five years, and traditionally serves as a blueprint for the implementation of governmental policy at all levels.
The Chinese government’s proposal for the 14th FYP is a key indicator of the directions and changes in the Chinese leadership’s development philosophy. China’s last three Five-Year Plans moved away from central planning-style hard production targets and described broader development objectives, relying more heavily on a ‘managed market’ to achieve such goals.
The 11th and 12th Five-Year Plans placed a high priority on improving Chinese citizens’ well-being through wage increases, education opportunities, sustainable development and healthcare. The 13th Five-Year Plan (2016-2021) aimed to make China a “moderately prosperous society” by 2020 by increasing domestic consumption, speeding up urbanisation and improving people’s livelihoods. In the process, the “relatively rapid economic development” sought in the 12th Five-Year Plan was downgraded to a “medium-high speed of growth”. Still, the Chinese government was able to achieve former president Hu Jintao’s 2012 decree that China would double its national 2010 GDP by 2020 (from US$6 trillion to around US$12 trillion).
Under China’s 14th FYP, China will seek to rebalance its economy with supply-side structural reforms. It will expand domestic demand and continue to support international export markets. For the first time, it is likely that this next Five-Year Plan will not contain a specific growth target – rather, China will seek to attain per capita GDP of US$30,000. That will be three times the current level.
Innovation and technological advancement
China’s 12th and 13th Five-Year Plans indicated the nation’s determination to push for innovation. With China’s rising labour costs, innovation is a necessity. Not unlike the 13th Five-Year Plan and the release of China’s Made in China 2025 policy, the 14th FYP will continue China’s transition from producing cheap, low-tech goods to being a high-end and specialised producer of goods. The 14th FYP will encourage China’s transition to “tech self-sufficiency”.
In March 2015, Chinese Premier Li Keqiang introduced the “Internet Plus” concept. This entailed integration of mobile Internet, cloud computing, big data and the ‘Internet of Things’ with modern manufacturing, fostering new industries and business development, including e-commerce, industrial internet and internet finance. Internet Plus aimed to promote innovation-driven development, upgrading China from a “big industrial country” to a “powerful industrial country”. The 13th Five-Year Plan also pursued the goals of three network convergence, accelerating fibre optic network construction, improving broadband speed and promoting information consumption.
Under the 13th Five-Year Plan, innovation extended beyond the Internet to liberalising regulatory hurdles and streamlining administration. It also went beyond “indigenous innovation” to include attracting foreign expertise and know-how in areas such as emerging technologies, technological education, high-end manufacturing and clean energy.
Under the 14th FYP, China will continue to encourage foreign collaboration in R&D and open technology. China will continue to focus on digitisation and digital infrastructure, including 5G, smart cities and the Internet of Things applications for manufacturing. According to a recent McKinsey report, China now has 45 per cent of global e-commerce transactions, and mobile payment penetration in China is three times higher than in the United States. The top 10 per cent of Chinese companies have already digitised and captured 90 per cent of total economic profit in China.
Facing environment deterioration and energy shortages, under the 12th Five-Year Plan, China committed to:
Under the 13th Five-Year Plan, China had no choice but to enhance green development. It promoted clean industrial production, low-carbon development and energy conservation in a bid to ensure sustainable growth. According to a program released in June 2015, China aimed to hit its CO2 emissions peak by around 2030 and slash CO2 emissions per unit of GDP by 60-65 per cent from the 2005 level.
It is unlikely that China will set an absolute target for cutting carbon emissions in the 14th FYP – only pledging that they will peak by around 2030. By then, one-fifth of the country’s energy will come from non-fossil fuel sources. China aims to be carbon neutral by 2060. Currently, the proportion of coal in China’s energy mix is falling but the use of coal in China is still rising in absolute terms.
In this context, China will continue to seek Australia’s higher-quality coal (especially coking coal), and there will be clear opportunities for Australian companies to sell their expertise in urban development and environmental innovation to China. Australian companies can also develop innovation plans that will assist China to reach its non-fossil fuel primary energy consumption target.
China’s efforts to peak CO2 emissions by 2030 will rely, to a large extent, on China’s Made in China 2025 goals in regard to power and new energy technologies and materials, such as batteries. China plans for half of its vehicles to be electric or fuel-cell powered and the remaining to be hybrid by 2035.
Australian companies can leverage upon their energy solutions or products to seek market entry themselves or through collaborations with Chinese partners that result in the cutting of China’s CO2 emissions and the raising of China’s forest stock.
Australian companies can seek to grasp opportunities that may emerge in respect of ‘clean coal’ solutions, technology transfer, wind power expertise, utility-scale solar, plug-in vehicle solutions, advanced battery solutions, alternative fuels, integrated water solutions for heavy industry, water usage and management technologies, water recycling solutions, advanced building materials, energy-saving solutions for smart buildings, among others.
The announcement of China’s economic goals through to 2035 comes at a time when the Communist Party of China is celebrating its centenary. It is only the second-ever 15-year plan released by the Communist Party of China. The plan focuses on “socialist modernisation” of China by 2049 (the centenary of the People’s Republic of China), by making China prosperous, strong, democratic (in the Chinese sense), culturally advanced and harmonious.
The plan includes a drive for China’s government and tech companies to set global standards for technology, in areas like 5G, the Internet of Things, AI, automation and green tech. Historically, modern China has been known for Tier 1 businesses (those who make things), and more recently Tier 2 businesses (those who design things). China plans to greatly enhance its number and profile of Tier 3 businesses (those who set standards) by 2035.
As China pursues its 2035 vision, there will be opportunities for Australian businesses (in fields like robotics, IT, fintech and green tech) to leverage their expertise. Such collaboration will face substantial legal and regulatory challenges and Australian business people operating in this space will need to be well advised and proceed with measured caution.
China’s leadership speaks of pursuing the “Chinese dream” of a better life, while at the same time asking its dreamers to adjust to a “new normal”. The better life is a fundamental tenet of the unwritten social contract between the Chinese leadership and their constituents. The “new normal” mantra serves to both temper expectations as well as act as a framework for sensible and sustainable development. How China evolves over the next five years is sure to have a significant impact on Australia and the world as a whole.
Author: Carl Hinze
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.