China strikes triumphal note over economic recovery as it looks to cut reliance on US technology

An economic planning meeting involving China’s top leadership ended on an unusually triumphalist note about the country’s recovery from Covid-19 as Beijing set out a series of policies to boost-self reliance amid its ongoing tensions with the US.

The statement released on Friday night at the end of the Central Economic Work Conference led with the message that China was the only major economy to post positive growth, saying it could “satisfy the people, catch the world’s attention and make history”.

However, the leadership also warned of the risks of an unbalanced and unstable recovery given external uncertainties.

While this year’s economic targets focused on the fight against poverty and pollution, the plans for 2021 – announced weeks after the authorities published the blueprint for the latest five-year plan – appear to be more strategic with a focus on boosting innovation, self-reliance in the supply chain and domestic demand.

There are also plans to improve food security, strengthen anti-monopoly measures, tackle housing problems and reach peak carbon emissions by 2035.

“The CEWC readout this year is the most interesting and notable since 2016, when Xi Jinping used the conference to formally kick off his financial de-risking campaign,” Michael Hirson, head of China at the US-based Eurasia Group, wrote in a note.

“There is not a similar dominant theme this year or discrete shift in policy, but an unusually clear prioritisation and articulation of Xi’s economic and geopolitical agenda as Beijing charts its course for the post-pandemic future, particularly boosting domestic innovation and reducing reliance on US technologies.”

Larry Hu, chief China economist from Macquarie Group, said in a note: “Other than the curb on big tech [anti-monopoly], the rest are all under the so-called dual circulation, which has two implications: self-sufficiency and domestic demand. Beijing adopted such a strategy because it views a decoupling between China and the US as its biggest long-term challenge.
“As such, Beijing has set ‘security” and ‘growth’ as the top two priorities under its long-term growth strategy, which underpins the eight major tasks above.”

Beijing’s policies to boost innovation include a 10-year plan to establish research and innovation centres to tackle problems such as its dependence on external supplies of items such as semiconductors, a key weakness in its technological competition with the US.

While China’s overall expenditure on research and development rose to 2.2 per cent of GDP last year – slightly lower than the 2.8 per cent in the US – just 6 per cent of its R&D expenditure went to basic research, which was much lower than an average of 15 per cent among developed countries, according to government data.

It also plans to focus on problems with the supply chain by solving technological “bottlenecks” and focusing on its “unique advantages” to reduce reliance on the US and other countries.

China will also actively consider joining the Comprehensive and Progressive Trans-Pacific Partnership Agreement, a trade bloc of 11 countries, which the US withdrew from under the Trump administration.
“This should be viewed as a long shot, especially for the foreseeable future, but shouldn’t be completely dismissed – the goal is aspirational but will help shape China’s policy agenda, including in areas such as data governance. It marks ambition by Xi but also a fear of being isolated as the incoming Biden administration looks to build coalitions to pressure China on key trade and technology policies,” Hirson said.

Ren Zeping, chief economist from Evergrande Research Institute, said president-elect Joe Biden would inevitably safeguard US interests and restrict China.

“Both Biden and [Donald] Trump view the rise of China as a challenge to the United States. However, there is a difference between Biden and Trump’s strategies towards China. Biden opposes Trump’s unilateral containment and anti-globalisation ideas, and hopes to restrict China through alliances,” Ren said.

In spite of striking an upbeat tone, Friday’s statement also identified several risks to the economy, from soaring debt levels and concerns about banks’ liquidity to rising bond defaults and unstable rental markets across the country.

China’s debt-to-GDP ratio this year could surge by 25 percentage points to 270 per cent from last year, partly due to measures to stimulate the economic recovery this year.

Beijing intends to lower the overall credit growth next year to match nominal GDP growth.