China’s latest five-year plan includes heavy investment in technology, innovation and soft power but still leaves key issues such as property reform unaddressed. Hong Kong’s commercial legal system can provide a template for legal reforms on the mainland.
What can investors expect of China in the next 10 or 15 years? Fortunately, it has laid out a mere 60 key points in its 14th five-year plan. Interestingly, it seemed to focus more on 2035 than 2025 – perhaps the kind of time span of control for which the current leadership feels responsible.
Amid the flurry of language about furthering a prosperous society, investors need to take note of the diamonds in the rough. The key focus must be on what China is really good at and what it can realistically accomplish with its assets of a population of 1.4 billion and the world’s largest middle class of nearly half that size.
The brightest area in the plan is technology and innovation, into which China will pour investments of people and capital the likes of which have never been seen. In these areas at least, young Chinese technologists will have free rein to be innovative and creative. If you are a young, ambitious student in China these days, concentrate on science and maths.
The sheer numbers of people allowed to think creatively in industry will lead to “major breakthroughs in key core technologies” such as semiconductors, telecommunications, big data and artificial intelligence. China is already a global leader in technology applications, as Alibaba, Tencent and WeChat demonstrate. In the past decade, this has led to life-changing adjustments to the convenience of how people run their lives, one example being digital payment systems.
Technology alone will not help China achieve “new industrialisation, informatisation, urbanisation and agricultural modernisation”. Some have pointed out that innovation was already the highest policy priority area in the previous five-year plan. One weakness of having the same policymakers is that it is difficult to come up with something new.
The policy of stimulating the economy through infrastructure development will remain, especially in trying to make rural areas more prosperous. Manufacturing will be emphasised, but it is already on the leading edge, if only for export industries. Unfortunately, these government-funded policies continue to squeeze out the consumer, who is a big part of the new “dual circulation” strategy of shifting the mantra of “Made in China” to “Bought in China”.
The nation’s exercise of hard power is obvious. The “Peaceful China” initiative includes strengthening national security and the military. China will most likely overtake the United States in terms of raw GDP by the end of the decade even if, as Chinese University academics writing for the Brookings Institute found, China’s GDP growth has been overestimated by nearly 2 per cent per annum since 2008.
While GDP might provide bragging rights, though, it makes relatively little practical difference. It was China’s current size that inspired the 15-nation Regional Comprehensive Economic Partnership to be signed last week after eight years and 31 rounds of negotiations, even though disputes between China and many of the signatory countries continue to fester.
The big challenge for China is not the extension of hard power but that of soft power, which the US has in abundance and China completely lacks. The five-year plan has moved from global “opening up” to “international cooperation”, but the US is more than a century ahead.
It is unlikely that China can successfully export its brand of command-and-control economic management; it takes a lot of work to plan from the centre, and you get blamed if anything goes wrong. China’s previous addition to aid was highly expensive, prone to corruption and had next to no financial or sustainable soft power return. Unsurprisingly, the Belt and Road Initiative has slipped down the priority list for the next five years.
Chinese soft power is more likely to see advances in areas like medical research, including in recent successes in vaccine development which China could effectively export. One of its most successful soft power exports has been ByteDance’s TikTok video app, although that has little to do with Chinese culture.
There are many issues left unaddressed in the five-year plan that investors would like fixed, such as legal and property reform. It is still possible for long-term farmers to be thrown off their land to make way for a golf course. Solid land rights and commercial law were at the heart of America’s early economic success and are vital for economic confidence.
Perhaps Hong Kong has a role to play. Recent political developments here have led to a significant drop in confidence among foreign investors, but the Chinese leadership is still committed to “one country, two systems” – even if the second system is purely economic.
Our economy is underpinned by a commercial legal system coded over centuries that preserves property rights secured by independent judges. Whatever happens politically, mainland policymakers know that Hong Kong commercial courts must be ring-fenced to preserve the second system. There is a case to say that Beijing could reform Chinese commercial law by allowing specialist courts and independent judges while leaving the rest intact.
For decades, the chattering classes in Hong Kong thought China would become more like Hong Kong. In this small area, we can provide an example to the mainland.