By USCBC staff
The PRC National People’s Congress concluded this month with the release of China’s 13th Five-Year Plan (FYP) on National Economic and Social Development. Outlining economic policies and targets to drive industry development in China through 2020, the plan focuses on maintaining economic growth and social stability while continuing reform efforts. Key priorities include resolving nationwide industrial overcapacity, promoting investment across sectors, strengthening property protection, supporting SOE reform and private sector development, reforming healthcare coverage and approval procedures, addressing licensing barriers, modernizing agricultural efficiency, encouraging workforce population re-balancing and rural area entrepreneurism, advancing technology innovation, emphasizing energy efficiency, and reducing carbon emissions. Woven throughout the fabric of the FYP is an underlying principle of supply-side economic reform.
With these themes at the forefront of China’s development agenda, companies may encounter more restrictions and increased operating costs. However, companies may find opportunities for new investments as China restructures industry growth models in its continued transition to a service- and consumption-based economy.
See how specific targets stack up to previous goals and outcomes in this chart.
Supply-side structural reform
The FYP recognizes the economic challenges brought by excessive investment spending and demand stimulation in the past five-year period. Supply-side structural reform is the guiding principle of development underlying many aspects of the FYP, highlighting the importance of innovation and coordination to boost supply and satisfy demand as part of a sustainable growth model. These reforms are aimed at addressing industrial and real estate overcapacity, high corporate tax burdens, and high-level risk in the financial system. To do so, the FYP indicates that China will stimulate innovation by improving productivity through development across sectors such as healthcare, agriculture, ICT, and energy.
Ultimately, supply side structural reform in the FYP aims to tackle four challenges stemming from half a decade of demand stimulation: capacity utilization, unused real estate stock, excessive corporate taxes and costs, and unchecked fiscal risks.
- Capacity utilization Concurrent, effective competition strategies are necessary to increase competition as part of supply-side review.
- Destocking The FYP recognizes real estate will continue to be a core pillar of China’s economic development. Sustainable growth of the real estate market will offer a pressure valve for overcapacity in steel, cement and other industries. New urbanization development strategies–deepening the household registration system, expanding residency permit systems, and pursuing changes to China’s domestic property rights–will ensure new real estate capacity is consumed.
- Tax breaks and costs The FYP highlights reductions and reforms to the corporate income tax structure as well as elimination of government fee and fund contributions to free capital for corporate investment.
- Fiscal risks Calling for additional private capital to invest in state-dominated sectors such as banking, insurance, and internet finance, the FYP aims to reform the domestic regulatory environment, allowing non-state actors to play a larger role in supporting China’s economic transition and ultimately stabilizing risks developed over the 12FYP period.
Recognizing the staggering impact of overcapacity on the industrial system, the FYP calls for reducing supply in saturated sectors by merging, upgrading, and restructuring underperforming companies; reworking government subsidies that promote unprofitable manufacturing; and, ultimately, bankruptcy and liquidation of unprofitable companies. Though the rhetoric is encouraging, the conflicting goals on addressing overcapacity raise questions about how reforms can be effectively implemented.
The plan urges nonferrous metals, steel, and heavy machinery companies (and others with declining domestic demand) to find international markets, which better aligns with President Xi Jinping’s One Belt, One Road initiative, a long-term economic strategy to “deliver benefits to the region” and boost economic integration across the continent. Sending capacity abroad will offer temporary relief for the beleaguered industries, but will reduce the urgency to lower production capacity or reform company operations. This course also implies an effort to export China’s supply to other economies, which is unlikely to be well-received by foreign companies in those sectors or by their governments.
Though the FYP emphasizes the systematic risk presented by “zombie” companies—in essence, unprofitable companies unable to pay debt that nonetheless remain in operation and perpetuate overcapacity — there are no details about how to relieve expanding debt load within industries plagued by these issues. Despite references to liquidation, restructuring, and bankruptcy, the plan strikes a cautious tone on layoffs and relocation of displaced workers—an inevitable outcome if a company goes out of business. Chinese policymakers have made clear their intent to balance a stable society with the needs of aggressive restructuring, and it is uncertain how those competing interests can both be met.
The FYP indicates China’s plans for the gradual liberalization of foreign investment, including the eventual implementation of national treatment for domestic and foreign investors prior to entering the market, known as “pre-establishment,” with a negative list approach to managing foreign investment. The plan calls for a unified foreign and domestic investment system. Similarly, the plan highlights the need to formulate “basic laws” for foreign investment, indicating growing emphasis on finalizing legislation like the draft Foreign Investment Law. USCBC has consistently advocated for China’s policymakers to do away with the foreign investment classification and govern all legally-established companies in China under the same laws and regulations.
The FYP notes the need to expand openings, reduce market access barriers, and encourage foreign capital and advanced technology to improve the overall quality of foreign investment in China. To achieve those goals, several sectors are targeted for liberalization including education, construction design, accounting, and auditing. The plan suggests expanded market access for foreign companies engaged in banking, insurance, securities, and pensions, while encouraging those in advanced manufacturing, high and new technologies, and energy efficiency to invest in China’s Northeast, Central, and Western regions.
The FYP includes a chapter on establishing a modern property rights system to better protect corporate property, state-owned property, rural collective property, natural resources and intellectual property. With regard to IPR, the plan is much more explicit than its predecessors in calling for the creation of a system that better safeguards the interests of rights holders, and improves judicial recourse for rights violations to more effectively stimulate innovation. It also specifically calls for a crackdown on counterfeiting. It remains unclear how these concepts will be implemented or whether they will impact foreign IP rights holders differently than their domestic counterparts.
SOE Reform and support for the private sector
The plan uses broad language to address state-owned enterprise (SOE) reform but falls short of calling for bankruptcies, privatization, or stronger market orientation for SOEs.. For example, an article entitled “Vigorously push forward SOE reforms” begins by calling for implementers to “unswervingly strive to make SOEs strong, superior, and large.” The plan also calls for the cultivation of a group of internationally competitive “backbone companies.” Internationally competitive companies are not necessarily large, however, and given the FYP’s concurrent goals of reducing overcapacity, it is difficult to see how consolidating SOEs into larger firms will eliminate the excess capacity that plagues many sectors. Additionally, merging multiple underperforming assets into larger SOEs does nothing to strengthen operations or increase competitiveness. Although the plan focuses on managing SOE capital, increasing efficiency, and developing a mixed-ownership economy, concrete action plans are still needed to understand the types of reform that will genuinely be undertaken.
The plan calls for greater efforts to support China’s growing private sector by eliminating various prohibitive regulations and hidden barriers, and better ensuring that private enterprises are afforded legal protections to enable them to fairly compete in the marketplace. More broadly, it aims to accelerate the transition to a more open and competitive market system through improved antitrust enforcement, greater price liberalization, and the removal of various market barriers, goals that were similarly articulated in previous plans.
In response to local government debt, the plan seeks private capital for public infrastructure and aims to reduce market access restrictions for private investment in infrastructure and public operations. Previous USCBC analysis has found this type of program—sometimes called a Public Private Partnership (PPP)—effective for companies in assisting local governments with development.
Healthcare and Poverty Alleviation
The FYP contains a variety of measures focused on poverty alleviation, specifically to lift 50 million Chinese citizens out of poverty by 2020 and implement universal healthcare. Much in line with the 12th FYP, these measures advocate increased healthcare industry investment from both the public and commercial sectors.
To achieve the healthcare and medical service goals proposed in China’s 2020 Health Action Plan, the FYP expands upon previous healthcare reforms, calling for improved coverage of both urban and rural residents; equal treatment and stronger collaboration between hospitals, public health agencies, and primary health institutions; increasingly efficient evaluation and approval procedures for new medical devices and drugs; improved research and development for new medicines; an increasingly advanced online system for healthcare management and sales; and better distribution of medical resources in Central and Western China.
The plan also calls for expanded food and drug safety. Recognizing gaps in the regulatory environment, the FYP prioritizes improved food and drug safety standards, increased monitoring of imported food, and stricter supervision of online food and drug sales. The plan was released just days before an investigation was launched into the illegal sales of improperly stored vaccines.
Licensing barriers, a top challenge in USCBC’s annual business environment survey year after year, are addressed with a call for decentralization and reform. A negative list is proposed to demarcate the rights and responsibilities of government, the market, and other actors, and to optimize government service and efficiency. Leveraging reforms piloted in the Shanghai Free Trade Zone, the government aims to boost efficiency by moving away from an approval-based system of supervision to a decentralized one based on notification after-the-fact.
Modernization of the agriculture industry was carried over as a key theme from the previous FYP, but is no longer as closely linked with rural development and fast production. Instead, the 13th FYP emphasizes improvements to efficiency and quality, including increased use of advanced technology, better use of environmentally-friendly farming techniques, and strengthening of supply chains and distribution facilities.
The FYP also calls for greater international cooperation in agriculture, including better trade regulation mechanisms, increased imports of needed products, and establishment of large-scale production, processing, and storage bases overseas. As part of China’s economic transition from manufacturing-led to services-led growth, the plan advocates for integrating agriculture with services industries such as tourism, education, and health.
In addition to general modernization, other goals that received mention in both the 12th and 13th FYPs include development of a modern seed industry, demonstration zones for agriculture, greater food security, and price and subsidy reform.
While the 12th FYP specifically addressed worker rights and relations between workers and employers, the 13th FYP’s treatment of labor issues is less specific and geared more toward ensuring the continued development of employment opportunities. The previous FYP encouraged workers from rural areas to find employment in cities as part of the urbanization process; the 13th FYP clearly anticipates a continuation of urban migration, calling for the creation of more than 50 million new urban jobs. To achieve this goal, the government will seek to improve wages, health benefits, job classification, pension security, and other benefits to offer stronger labor incentives to workers. The government will also seek to improve the circumstances for foreign talent in China via improving immigration and residency management services.
In a departure from previous plans, the new FYP also advocates for urban entrepreneurs to return to their rural hometowns to stimulate new business opportunities outside of first-tier cities. Additionally, the plan addresses workforce issues related to the aging population, for instance, by reiterating the government’s new two-child policy, which is partly aimed at ensuring that the future labor force is sufficient to support a growing elderly populace.
The FYP includes ambitious plans for ICT development and links national goals to the progress of tech- and Internet-based industries, building off of previous plans such as Internet+, Made in China 2025, and the Big Data Strategy. Through these policies, China aims to integrate ICT solutions into national socio-economic development.
- Internet+ and Internet Solutions The plan calls for using concepts from the Internet+ Plan to enhance, revitalize, and optimize traditional areas of industry. The FYP specifically identifies internet and cloud based technology as tools for development in areas such as agriculture, urbanization, supply chain management, financial applications, and in optimizing standards setting, among others.
- Big Data Strategy The FYP states that big data collection in every industry should be integrated for market supervision, social governance, and public service. The plan also calls for big data in smart city construction, environmental protection works, and remote and smart medicine.
- Secure and Controllable While the FYP does not include language explicitly calling for the adoption of “secure and controllable” technology, it does indicate “indigenous and controllable” operating systems, high-end industrial and large scale management software, and artificial intelligence technology in emerging areas should be developed.
- Emphasis on Cybersecurity The FYP stresses the importance of cyber governance, calling for the development of cyber security regulations, as well as strengthening guarantees on information security — including information gathering, storage, application, and the sharing of data.
China declared a “War on Pollution” in 2013. The current FYP is the first to be released since that announcement and advocates a more forceful effort to tackle environmental challenges. Quantifiable targets include increasing the nationwide use of non-fossil fuels by 15 percent, decreasing energy consumption by 15 percent, and implementing PM 2.5 level cuts of 18 percent. Other goals include reducing carbon dioxide emissions and constructing low-carbon trial units. National initiatives, such as an expected national carbon trading platform and green tax, will be rolled out before 2020.
The plan also hints at more standardized enforcement, proposing “multi-regional” environmental protection bureaus that prevent inconsistent oversight among different districts. A united online environmental monitoring system would also require expanded disclosure requirements for companies.
The broad themes presented throughout the FYP shed light on the central government’s intended direction of the Chinese economy. Individual PRC government agencies will soon begin to release their own five-year plans, drawing on these themes to outline specific implementation procedures for 13th FYP targets. This will include the development of joint-agency plans for certain issues that are managed by multiple agencies. In addition, the State Council will release policy documents that detail specific measures for implementation. As companies form their corporate objectives, identifying areas in which their business can align with PRC government priorities is a general best practice and can result in long-term government support. USCBC will continue to carefully monitor and report on these upcoming developments.
About the authors: This US-China Business Council analysis was written by USCBC staffers who closely monitor developments in these key areas.USCBC is a private, nonpartisan, nonprofit organization of more than 200 American companies that do business with China. Founded in 1973, USCBC has provided unmatched information, advisory, advocacy, and program services to its membership for more than three decades. Through its offices in Washington, DC; Beijing; and Shanghai, USCBC is uniquely positioned to serve its members’ interests in the United States and China.