China to set five-year plan for steering economy through choppy waters

China’s leaders will chart the country’s economic course for 2021-2025 at a key meeting starting on Monday, seeking to balance growth and reforms to avoid stagnation amid an uncertain global outlook and deepening tensions with the US.

President Xi Jinping and members of the Central Committee, the largest of the ruling Communist Party’s elite decision-making bodies, will meet on Oct. 26-29 behind closed doors to lay out the 14th five-year plan, a blueprint for economic and social development.

The plan and its execution will be crucial for China to avoid the so-called “middle income” trap, policy insiders say, referring to the struggle of many economies to boost productivity and shift toward higher value-added industries. “Although the Chinese government has been calling for a transition in the development model for a number of years, we think the next five years will be particularly important, both politically and economically,” Goldman Sachs economists wrote in a note ahead of the plenum, the fifth meeting of the Central Committee since the 2017 party congress.

Sustaining steady growth will be the priority, even as expectations grow that the leaders could announce fresh reforms to spur domestic demand, innovation and self-reliance under Xi’s new “dual circulation” strategy, policy insiders said.

Investors also will be closely watching to see if China moves to

a more flexible economic growth target, after dropping it this year for the first time since 2002 due to the uncertainty caused by the coronavirus crisis.

Some analysts say dropping growth targets would reduce the country’s reliance on debt-fueled stimulus and encourage more productive investment.

China, where the COVID-19 outbreak first emerged, has mounted a robust economic rebound after quashing the domestic spread of the virus, but global prospects remain gloomy and the pandemic has added to tensions with the US.

“China’s potential growth rate will slow further due to the aging population, weakening effects from investment in driving growth and diminishing dividends from globalization,” said Tang Jianwei, senior economist at Bank of Communications.

“To reverse the slowdown, we need deep-rooted reforms.”

Policy sources have told Reuters that China’s leaders are set to endorse a lower growth target compared with 2016-2020. Government think tanks and economists have made recommendations for average annual gross domestic product (GDP) growth targets of between 5 and 6 percent, the sources said.

The plan to be discussed and approved by leaders next week is expected to be unveiled at the annual parliament meeting in early 2021.

“We need to maintain a balance between development, stability, and risk prevention,” said a policy insider. “Macro adjustments will be more difficult and this will present a test for policymakers.” Xi’s strategy to guide the next phase of development, which points to an inward economic shift, has fanned calls by government advisers for reforms to unleash domestic growth drivers, including loosening curbs on residency and land rights and boosting household incomes. Speeding up reform of the household registration “hukou” system would enable migrant workers to enjoy more social welfare benefits, while land reform would enable farmers get a bigger share of the gains from land deals. Both measures would spur urbanization and consumption.

Expected moves to further free up interest rates and expand the role of capital markets would address distortions in credit allocation that see huge state banks lend to state companies while the private sector is often deprived of credit.

Chinese leaders are also expected to discuss further plans to curb greenhouse gas emissions and ease reliance on imported technology, especially semiconductors, as Washington squeezes Chinese tech giants including Huawei Technologies and Semiconductor Manufacturing International.