From March 4 to March 11, Beijing hosted its annual “Two Sessions”— meetings of the National People’s Congress (NPC), China's legislature, and the Chinese People’s Political Consultative Conference (CPPCC), a political advisory body. This year’s NPC had special significance as it approved both annual plans for 2021 and the 14th Five Year Plan (2021-2025) with long-term goals for 2035.

The 100-page-long 14th Five-Year Plan (14FYP) covers all manner of sectors and issues. To help make sense of this crucial document and what it means for business, the plan can be boiled down to the “Big Three” themes that will shape China’s markets in the next five years and beyond.

The Big Three

1. Digital economy supported by all-round innovation upgrading. Innovation and the digital economy are core thrusts of the 14FYP to fuel future growth and compete with and ultimately surpass western advanced economies. The plan calls for more support to both basic research and cutting-edge applications and to raise the share of the digital economy in national GDP to 10% by 2025, from around 7.8% in 2020. To support this development, the plan calls to develop digital infrastructure such as cloud computing, the Industrial Internet, and blockchain, and nurture efficient markets for data. However, a somewhat conservative target for the annual growth for national R&D spending (7%) limits hopes for a major ramp up of innovation investment in the short term.

2. Green development driven by decarbonization. Following President Xi’s 2060 carbon neutrality pledge, the 14FYP attaches more importance to low-carbon development. The 14FYP sets binding targets for 2025 to reduce energy consumption intensity and carbon emission intensity by 13.5% and 18% per unit of GDP, respectively. Non-fossil sources should account for approximately 20% of total energy consumption by 2025, primarily by expanding wind and solar power. However, the green outlook for China’s economy is dimmed somewhat by continuing support for coal power, in part to meet energy security goals.

3. “Domestic circulation” supported by balanced urban and rural development and advanced manufacturing. Boosting domestic demand is a pillar of China’s Dual Circulation Strategy to become more self-sufficient and globally competitive. Urbanization is targeted to reach 65% by 2025, up from 60.6% in 2020. This will expand the base of urban consumers under the National New Urbanization Plan (2021-35). At the same time, government efforts to spur “rural revitalization” will help unlock the growth potential of rural areas by improving the rural living environment and modernizing agriculture. On the supply side, China will promote smart and sustainable advanced manufacturing, restructuring traditional industries such as chemicals and promoting strategic emerging industries including new energy, new materials, and new energy vehicles.

Why it matters

Over the next five years and beyond, the “Big Three” themes outlined above – digital economy and innovation, green development and decarbonization, and domestic circulation – will guide regulatory trends and the deployment of public and private resources, reshaping all manner of sectors. This has major implications for MNCs' future growth paths in China. It calls to pursue opportunities aligned with the “Big Three” themes and align capacities accordingly so that MNCs can show their contributions to China’s development and ensure they are among the winners in the long run.

- The continued growth of the digital economy will substantially increase B2G business. It will also widen the performance gap between companies that lead in digitalization and those that get left behind.

- China’s decarbonization drive will push major SOEs in industries such as energy, chemicals, and steel to undertake green transformation. This will enhance the competitiveness of these players in the field of sustainability, closing the gap with MNCs, but also make these firms promising partners and customers for low-carbon solutions. Additionally, the environmental protection crisis at the plant level is expected to increase and makes it imperative for MNCs to build a viable local crisis management system.

- Efforts to boost domestic demand supported by “New Urbanization” and “rural revitalization” will further test MNCs' capacity to penetrate into lower-tier growth markets, a feat that has traditionally proved challenging for foreign firms.

- For MNCs, in the coming years, China’s market will continue to present more opportunities than challenges. Market and policy conditions favor R&D-focused localization strategies to show local commitment and stay close to customers in the intensifying innovation contest. MNCs should be able to tap increased R&D incentives, such as support for R&D centers and access to state-led programs, and take advantage of opening in sectors such as telecoms, internet, and healthcare. However, risks for MNCs will also accumulate as security-related mechanisms such as the unreliable entities list will be expanded.