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China’s five-year domestic supply plan focusing strong domestic supply

Amid the present shuffling of global trade and US-China trade war, the government in China is set to focus on domestic consumption and production in China’s next five-year plan, which is due to be released in March.

The guidelines are a development of China’s current policies and aim to: Lessen its weakness to troubles from international supply chains; Rise domestic consumption’s role in supporting economic growth; Increase productivity as an aging people limits China’s long-term growth potential; and Rise the sustainability of economic growth as energy efficiency and environmental issues become crucial constraints, according to an update published following the semi-annual meeting of its top leaders, the upcoming 14th Five-Year Plan (2021-25) emphasizes the quality – rather than the pace – of economic growth.

China-five-year-domestic-supply-plan-focusing-domestic-supply
Figure: The exterior environment has become less promising for China: ongoing strains with the US, supply-chain disruptions from the COVID-19 pandemic and deglobalization.

Moody’s Investors Service analysis suggests that among the highlights is the ‘Dual circulation’ growth model that encourages domestic supply and demand. This strengthens some prevailing policy themes such as growing China’s economic reliance on domestic consumption, moving up the value chain, increasing production efficiency and boosting innovation.

What is new, though, is the growing dependence on domestic supply, a policy theme that China planned with its ‘Made in China 2025’ initiative.

“The exterior environment has become less promising for China: ongoing strains with the US, supply-chain disruptions from the COVID-19 pandemic and deglobalization,” Moody’s analysts say.

Bigger dependence on domestic supply will surge self-sufficiency – reinforced by domestic supply chains – and China’s capability to meet its domestic market needs, mainly the production of critical goods such as technology, medical supplies, chemicals and others related to national security.

At the same time, the potential to change China’s trade patterns – both exports and imports – its domestic supply chains, and its domestic consumption categories.

As with Made in China 2025 – the national strategic plan to upgrade China’s manufacturing sector – innovation and technology independence will remain a key component of the country’s economic development.

China is looking for elevating its manufacturing industries by developing advanced and increasingly digitized production capacity, and reduce its exposure to supply-side disruptions. Environmental policies are also set to rise China’s focus on the environment and its commitment to reduce its carbon emissions by 2035.

Energy reforms are likely to shift the share of energy consumption to clean energy sources including hydro, biomass, wind, nuclear and solar while reducing the share from traditional energy sources including coal and oil. For companies that consume a large amount of energy, there will be more stringent environmental regulations and pressure to invest in clean energy.

The apprise comes as manufacturing activity in China gushed to a near-decade high in October as China continued to recover from the COVID-19 pandemic.

But foreign demand softened amid a revival of the coronavirus across several export markets. While China is the world’s largest producer of apparel and footwear and raw material inputs, there are signs that US fashion companies, in particular, are moving to source less from China by shifting orders to competitors in Asia, such as Vietnam and Bangladesh.

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