The 14th Five-Year Plan of the People’s Republic of China—Fostering High-Quality Development (Observations and Suggestions No. 2021-01)

This policy notes outlines recommendations for the 14th Five-Year Plan (2021–2025) for National Economic and Social Development of the People’s Republic of China that highlights high-quality green development. The plan emphasizes innovation as the core of modern development, relying on the dual circulation strategy as the growth paradigm coupled with reforms to increase living standards. Building on the achievements of the 13th Plan, it aims to reduce the carbon intensity of the economy and peak carbon dioxide emissions before 2030. This policy note’s recommendations focus on innovation-driven growth, low-carbon development, integration of urban–rural areas with deeper social inclusion, and population aging as priorities.

Building on the achievements of the 13th Plan, it aims to reduce the carbon intensity of the economy and to peak carbon dioxide emissions before 2030. The Plan emphasizes innovation as the core of modern development, relying on the dual circulation strategy as the growth paradigm coupled with reforms to increase living standards. 中华人民共和国(中国)"国民经济和社会发展第十四个五年规划"("十四五"规划) (2021-2025年)于2021年3月审议通过，强调高质量、绿色发展。基于"十三五"规划取得 的成果，"十四五"规划的目标是降低经济的碳强度，并在2030年前达到二氧化碳排放峰值。 "十四五"规划强调，创新是现代发展的核心，要依托双循环战略作为增长模式，结合各项改 革，提高人们的生活水平。 • In support of inclusive urbanization, the Plan announces reforms to further relax the household registration system (hukou), provide more equal access to public services for migrants, as well as increase labor mobility through cross-region development plans. The Plan also reflects the need to improve the public health system and to develop a long-term elderly care system. 为了支持包容性城市化，"十四五"规划宣布通过改革进一步放宽户籍制度(户口)限制，为流动 人口提供更平等的公共服务，同时制定跨区域发展计划，促进劳动力跨区域流动。"十四五"规划 还提出，要改善公共卫生系统，发展长期养老体系。 • Key recommendations include continued rebalancing of the economy toward services, to which increased household consumption could contribute. Strengthening household consumption would also increase domestic demand. Better access to quality public health and elderly care, and education would reduce the need for precautionary saving. 主要建议包括继续推动经济再平衡，通过增加居民消费，促进经济向服务业转型。提升居民消费 也可拉动内需。改善高质量公共卫生、养老和教育服务，可减少预防性储蓄的需要。 • Carbon dioxide emission reduction plans should be accelerated. With manufacturing expected to keep a stable share in the economy, aiming for peak emissions before 2030 will put enormous pressure on the economy to reach carbon neutrality by 2060. 应加快减少二氧化碳的排放。由于预计制造业占经济的比重将保持稳定，在2030年前实现碳排放 达峰的目标将给中国经济在2060年之前达到碳中和带来巨大压力。

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Integrating urban-rural areas and reducing differences between their living standards would require an integrated approach of hukou, land, and social security reforms paired with improved job opportunities and equal access to health care and education in rural areas. Establishing a sustainable 2. The Plan envisages renewed efforts to close the urban-rural divide, paves the way to peak carbon dioxide emissions before 2030 and reach carbon neutrality before 2060. These objectives are reinforced by the longer-term perspective of the PRC's Vision 2035, which lays down the path for the country to become a moderately developed country and a global leader in innovation by 2035.
3. The new policy guidelines will be refined in the coming months and implementation blueprints will map out the envisaged reforms. Innovation-driven growth, low-carbon development, deeper social inclusion, and population aging are priorities that deserve attention. Making the right policy choices in these areas is essential for success. This policy note outlines policy recommendations to that end.

II. THE MAIN OBJECTIVES OF THE 14TH FIVE-YEAR PLAN
4. The Plan has 20 quantitative targets, 8 of them binding, under five categories: economic development, innovation, people's well-being, green development, and food and energy security. 1 It is noteworthy that seven targets focus on people's well-being, the highest proportion in any plan. This section highlights the key objectives of the Plan in four main areas.

5.
Annual gross domestic product growth targets for the first time. Deviating from past practice, the Plan does not include a gross domestic product (GDP) growth target for the 5-year period.

中华人民共和国第十四个五年规划--推进高质量发展
Growth targets will be set up annually allowing greater flexibility for policy makers to adjust growth targets to macroeconomic conditions. The country's longer-term development goal of becoming a moderately developed country by 2035 implies doubling the size of the economy by then, which requires an average annual GDP growth of 4.7% over the coming 15 years. Other targets include labor productivity growing faster than GDP, which is important in the context of an aging society with a shrinking labor force.
6. Manufacturing and digitalization gain prominence. The Plan aims to keep the share of manufacturing in GDP stable after a decade of decline. Fiscal incentives, wider access to credit, and more efficient industrial land use are among the tools to support the sector. The digitalization of the economy will continue with the share of the digital economy in GDP set to increase to 10% of GDP by 2025, from 7.8% in 2020. Cloud computing, big data, internet (including internet of things and industrial internet), block chain, artificial intelligence, and virtual and augmented reality will be supported.
7. Innovation at the center of the modernization agenda. A 10-year action plan for basic research and an annual increase in research and development (R&D) spending by at least 7% are at the core of the PRC's initiative to enhance scientific and technological capability. This is expected to unleash indigenous innovation and reduce the country's reliance on foreign inputs, mostly in high-technology manufactured goods. Efforts will focus on aerospace, biotech, neuroscience, artificial intelligence, quantum computing, and semiconductors, where the country expects to become a global leader in the longer term.

8.
A new development paradigm. The Plan introduces a new development concept, the dual circulation paradigm. It targets the expansion of domestic demand through strengthened supply chains supported by industrial policies, indigenous innovation, and increased domestic consumption. This approach envisages less reliance on heavy industries by proposing a new target to increase the share of the strategic emerging industries (i.e., advanced manufacturing, including high-end machinery and equipment, advanced materials, and electric vehicles) from 11.5% of GDP in 2019 to over 17% by 2025. The approach also includes reforms to increase market competition and improve the efficiency of state-owned enterprises (SOEs) through incentive mechanisms and gradually adopting market-based salaries.
C. Environment and Climate Change 9. Toward carbon neutrality. Green development features prominently in the Plan with five of the eight binding targets set in this area. During 2021-2025, energy and carbon intensity are targeted to decline by 13.5% for energy and 18% for carbon intensity per unit of GDP. Other binding targets include increasing (i) the share of days with good air quality in cities up to 87.5% (from 87% in 2020); (ii) the share of surface water at or better than grade III up to 85% (from 83.4% in 2020); and (iii) forest coverage up to 24.1% (from 23.2% in 2019). 2 As a nonbinding indicator, the proportion of nonfossil fuels in primary energy consumption is set at 20% from 15% in the previous plan. The Plan promotes low-carbon development and the circular economy with new approaches to transport, energy production, and waste management policies.

D. Urban-Rural Inequalities and Demographic Trends
10. Integrated urban-rural development. In the context of promoting more balanced regional development, the Plan steps up efforts toward an integrated development model to close the urban-rural divide. The Plan stresses the need for a comprehensive rural transformation, including the modernization of the agriculture sector and the promotion of green and smart agriculture, to generate attractive employment and investment opportunities in rural areas. In cities, urbanization, set to rise to 65% by 2025 from about 60% in 2019, will prioritize a more equal access to public services for migrants with links to cross-region development plans. Labor mobility will be fostered by removing hukou (residential permit) restrictions for cities with 3-5 million residents coupled by an increased supply of affordable housing.
11. Better living standards. The Plan outlines actions to increase living standards and access to quality public services, including measures to (i) increase people's incomes, (ii) boost employment opportunities, (iii) build inclusive high-quality education and health systems, and (iv) enhance the social security system. Out of the seven targets directly related to people's well-being, three are new: (i) surveyed unemployment rate capped at 5.5%, (ii) certified assistant doctors up to 3.2 per 1,000 population, and (iii) nursery school places for infants under 3 years up to 4.5 per 1,000 population.

III. POLICY RECOMMENDATIONS
12. The Plan presents a unique opportunity to transit toward high-quality development by addressing the social and environmental challenges that have emerged after decades of rapid growth. This transition requires greater efforts to deepen social inclusion in an aging society, and to strengthen the environmental sustainability of the development model. In addition, putting domestic innovation at the core of the development agenda brings new challenges for policy makers as the country develops high technology on its own. Against this background, policy recommendations are proposed.

A. Growth and Innovation
13. Keep the focus on services. The Plan's focus on manufacturing is aligned with efforts to strengthen domestic innovation capacity in manufacturing and high technology, but this approach could undermine the expansion of the service sector and slow down development. Services play a significant role in improving production efficiency and promoting technical progress and innovation.

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The 14th Five-Year Plan of the People's Republic of China-Fostering High-Quality Development

中华人民共和国第十四个五年规划--推进高质量发展
Moreover, the carbon footprint of services production is generally much smaller than that of manufacturers. 3 To realize its potential as a source of growth, services should be given prominence in economic planning and a similar status to manufacturing in terms of fiscal incentives, resources allocation, and openness. A larger services sector would absorb labor surpluses from manufacturing and agriculture, and accommodate a significant share of the new workers entering the labor force each year. Furthermore, easing the employment rules for foreign workers as well as tax incentives could support high-value services, especially high-technology and financial services.
14. Upgrade human capital. While the Plan focuses on increasing years of education, tertiary education needs to be expanded as technological upgrading will require less low-and mid-skilled labor, but high-skilled one. The expected increased digitalization of the economy and the improved health and education services will also require upgraded human capital. Learning methods should encourage lifelong learning, creativity, innovation, and fostering problem-solving skills, with incentives at the firm level for the provision of on-the-job training. Promoting the use of English will facilitate the absorption of benefits deriving from technology transfers and innovation (footnote 3).
15. Support innovation. Innovation-driven growth is the key to long-term growth sustainability. Investments in R&D are envisaged in the Plan. In these efforts, it is important to ensure that a larger share of R&D spending is devoted to research, as typically most of the funding has been channeled to development. While public financial support is critical, the private sector can substantially contribute if private equity and venture capital are developed to increase financing options for innovative companies. The participation of universities and private foundations in financing R&D can also support government efforts. Selectivity is also important. The Plan's aim to advance innovation in multiple areas to become less dependent on foreign technology should be targeted for better results. It is recommended to focus on a reduced number of areas of advanced technology, while sourcing globally in others-an approach practiced by most advanced economies.

B. Dual Circulation Paradigm
16. Foster household consumption. To improve domestic demand, household consumption needs strengthening. Improvements in the provisioning of health and education services are needed to reduce precautionary savings-the PRC's gross domestic saving rate remains a world outlier at 44.0% of GDP in 2019. In addition, strengthened redistribution policies such as, for instance, a more progressive taxation system will shift resources to lower-income groups, boosting consumption as their propensity to spend tends to be higher. More affordable housing could support household consumption. Price increases in larger cities have made property unaffordable for the younger generation. However, policies to increase fertility rates and to advance urbanization hinge on affordable living space in cities. Actions to develop affordable housing should be coupled with stricter controls to 6 OBSERVATIONS AND SUGGESTIONS 观察与建议 contain speculative purchases, including the introduction of a property tax to rein in speculative real estate investment and provide revenue for local governments to develop affordable housing.
17. Increase economic efficiency. Economic efficiency is vital for the success of the dual circulation paradigm. Improving the efficiency of SOEs remains key given its monopolistic structure. Lowering access barriers and improved enforcement of the antitrust law will help to reduce market concentration, fostering competitiveness. This will result in lower production costs and prices, increasing the affordability and quality of the products and services provided, boost consumption and the role of domestic demand. The increased market liberalization will result in greater private sector participation in the economy, bolstering economic efficiency. Efforts are needed to remove entry barriers in services, mostly in health and education, which are essential to address the challenges of an aging society and the technological upgrading of the economy.
18. Strengthen institutions and capacity to support reforms. The transition to a development model that shifts the focus toward human well-being requires strengthened institutional capacity. This is particularly important at the local level and in lagging regions, where most of the public investments and services to support high-quality development must be delivered. In this context, reforms in central-local government fiscal relations should be advanced. As local governments provide most public education and health care services, their revenue base should be broadened, and their financial management strengthened to ensure adequate public service provisioning.

C. Environment and Climate Change
19. Ambitious environmental targets. Peaking carbon dioxide emissions before 2030 requires more ambitious energy and carbon intensity targets. For instance, a reduction in carbon intensity by 23% from the 2020 level instead of the proposed 18% would increase chances for success. While the Plan does not include a cap on energy consumption, provincial plans could set an ambitious target paired with tighter energy efficiency regulations. Incentives to develop innovative energy efficiency technologies with support from the private sector are critical to reducing energy intensity and should include penalties for industries that fail to meet the benchmark. 20. Foster low-carbon development and the circular economy. To scale-up low-carbon development, more investments in strategic clean and low-carbon technologies (i.e., carbon, capture utilization and storage, and green hydrogen technologies), and more market instruments that treat carbon emission allowances and credits as assets are needed. For instance, the launch of the national pilot for the Emissions Trading System could pave the way for the first carbon emission futures supported by reforms on the co-benefits of reducing greenhouse gas and waste emissions, emission controls enforcement and monitoring, and green technological innovation. Also recommended are improving water and land management for low-carbon cities; and adopting a circular economy blueprint that considers environmental, economic, and social costs across cities and product life cycles.

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The 14th Five-Year Plan of the People's Republic of China-Fostering High-Quality Development 中华人民共和国第十四个五年规划--推进高质量发展 D. Urban-Rural Inequalities and Demographic Trends 21. Accelerate rural development. Creating employment opportunities in rural areas to encourage labor migrants to return, and diversifying income generating activities (i.e., agri-services, ecotourism, and green jobs) to retain people in rural areas are essential to closing the urban-rural divide. Areas of focus could include (i) rural land reform to enable farm upscaling, leasing, and modernization; (ii) actions to increase resilience of agricultural value chains through climate-smart technologies and climate-resilient infrastructure; (iii) fiscal incentives to attract private investments to rural areas and promote the development of micro, small and medium-sized enterprises; (iv) improved quality of and access to public services and skill development programs for returning migrants; and (v) strengthening the management of ecosystems to conserve biodiversity and protect the income of those who depend on natural resources for their livelihood, through nature-based solutions.
22. Establishing a three-tiered elderly care system. The Plan stresses the importance of an inclusive long-term elderly care system, which is still in its infancy. The establishment of a functioning three-tiered elderly care system with home-based care as core support, community care as necessary support, and residential care as supplementary support requires attention. Needs are particularly acute in rural areas where home-and community-based care services are underdeveloped. A sustainable financial framework is needed for this to succeed, funded by both public and private sources. Better quality, cost-effective, and more responsive services for elderly care could be achieved by reforming the current input-based subsidy scheme to focus on services and performance. Examples include subsidies for people receiving services (rather than for facilities or number of beds) and vouchers for beneficiaries to choose service providers based on the quality of services.