Main challenges facing China in the next five years

As China concludes its 13th Five-Year Plan (FYP) this year, all eyes are on the new FYP for 2021 to 2025, a period that brings new domestic and international challenges.

A world of uncertainties

China issued guidelines on its 13th FYP in 2015, preparing the country for a “complicated” international environment, but no one expected at the time what the world would face.

In addition to the longstanding confrontation between China and the US over trade and technology, the COVID-19 pandemic has dragged down the global economy. The International Monetary Fund forecast a global contraction for 2020 of 4.4 percent in its latest outlook published earlier this month.

Although China is the only economy in the world to show positive growth in 2020 so far, a struggling global market is casting a shadow over its growth prospects.

In an attempt to maintain economic stability, China is working on what it calls “Double circulation”, a new pattern of economic development put forward by China’s top leaders in May, which aims to take the domestic market as the pillar and allow domestic and foreign markets to boost each other.

In line with China’s efforts to boost domestic consumption, the dual-circulation pattern is a natural choice for China, the world’s second-largest economy that is seeking to reduce reliance on some key high-tech imports as well as its dependence on external demand to maintain sustainable consumption. growth amid the epidemic.

The task of deleveraging

China has been working on deleveraging to avoid systemic risks, but the epidemic is making the job that much harder. China’s nonfinancial debt-to-GDP ratio is expected to rise sharply by 25 percentage points to nearly 300 percent of GDP this year due to credit stimulus and a decline in nominal GDP, according to a report. research published in September by Wang Tao, chief China economist at UBS.

S&P did something similar prediction in June, saying total credit will rise this year, but China has been reluctant to overuse debt to hit the growth target.

China has been cautious about the growth of corporate lending, especially in the debt-laden real estate sector.

Even in the midst of the epidemic, China’s policymakers have made it clear that the housing bubble must be contained: no more easy loans for indebted developers.

China’s central bank and the Ministry of Housing and Urban-Rural Development announced new financing rules for real estate companies in August, dubbed “three red lines”: 70 percent ceiling on liabilities to assets (excluding pre-sales), a net debt – equity ratio of less than 100 percent, and cash holdings at least equal to short-term loans. Companies that exceed these three red lines will be prohibited from taking out more loans.

The debt squeeze not only shows China’s determination to cool down the real estate market and avoid speculation, but also weighs on local government revenues and even the broader economy.

unbalanced development

China has opened the doors to public input at the 14th FYP, allowing anyone to submit opinions or ideas online. More than 1 million submissions were received in two weeks starting on August 16.

Livelihood issues, including an improved social security system, remain top concerns for the Chinese people, according to data published by the People’s Daily.

With the elderly population (over 65) jumping from just 8-9 percent during 2010-2015 to an estimated 14 percent in 2025, China’s spending on elderly care and social insurance is expected to rise dramatically, which requires further reform of the pension system. said the UBS report.

Meanwhile, unbalanced development, including the regional development gap and income inequalities, are obstacles to boosting the domestic market and realizing urbanization.

For example, last year, the total GDP of three provinces in northeast China, which suffered from a weakening economy and population outflow, only accounted for about 47 percent of the GDP of China’s richest Guangdong province. , according to official data.

Therefore, China has launched five regional development plans, involving Chengdu and Chongqing in the southwest, as well as the Greater Bay Area covering southern Guangdong province and the special administrative regions of Hong Kong and Macao. .

With continued efforts in poverty alleviation, China’s Gini coefficient, the gauge of the wealth gap, fell to 0.465 in 2019 from a peak of 0.491 in 2008, according to data from CEIC.

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