Commentary: For Its Next Five-Year Plan, China Must Navigate Three Key Dilemmas

1. The first paragraph highlights the intensifying global trend toward antiglobalization, with economic priorities shifting from efficiency to security and increasing government intervention. The traditional global division of labor based on comparative advantage is breaking down, causing more fragmented supply chains and reduced efficiency. Global economic growth is slowing, debts are increasing, and fiscal policy is caught between expansion and consolidation. Socially, wealth gaps and societal divisions are rising, fueling extremism. Internationally, there is a transition from the post-WWII order, increasing geopolitical conflict and military expenditure at the expense of welfare or increasing debt. [para. 1]

2. The second paragraph focuses on the impact these changes have on China, especially as the U.S. intensifies its suppression of China’s development. Domestically, China is experiencing the simultaneous weakening of its main economic drivers: exports and real estate, resulting in insufficient demand. While China must leverage its institutional, market, talent, and supply-chain strengths, it must also prepare for prolonged adversity. [para. 2]

3. Paragraph three examines the external environment for China, particularly the U.S. view of China’s peaceful rise as a threat. Since 2018, U.S.-China trade tensions have escalated, and in 2025 under Trump’s renewed presidency, tariffs and trade wars have intensified. This will likely lead to a broader confrontation encompassing technology, finance, and international rules, adversely affecting both China’s supply and demand. External demand for Chinese goods is set to decline, and U.S. restrictions on technology exports may disrupt China’s industrial chains, though in the long term, this creates opportunities for domestic innovation. [para. 3][election_info]

4. Paragraph four describes China’s internal economic transition from high-speed growth toward high-quality, demand-constrained growth. The main challenge for the 15th Five-Year Plan is insufficient demand due to weakening exports and real estate, and a slow-growing service sector which affects employment. While new industries like AI and the digital economy are growing quickly, they are still a small proportion of the economy, causing transitional employment issues. The roots of weak demand lie in institutional structures across statistics, fiscal systems, and social policies; hence, a consumption-oriented institutional reform is needed. [para. 4]

5. The “Challenges and opportunities” section (paragraphs 5-7) anticipates economic growth slowing to 4.5%-5% annually during the 15th Five-Year Plan. Key issues are the imbalance between supply and demand (resulting in lower nominal than real growth and income) and real growth falling below potential, thus increasing unemployment, especially among youth. The main challenges are escalating trade frictions, demographic shifts (aging and low birth rates), and local government finance/debt problems. Major opportunities include deeper non-U.S. international partnerships, building a unified domestic market, and explosive potential in human capital and innovation. [para. 5][para. 6][para. 7]

6. Planning and reform (paragraphs 8-10) should focus on balancing three core relationships: supply and demand (addressing qualitative supply shortages and excesses); investment and consumption (balancing their roles in demand generation); and manufacturing and services (growing services while supporting industrial security and technological content in manufacturing). The drivers for growth will be high-quality supply, effective investment, robust consumption, secure manufacturing, and open services. [para. 8][para. 9][para. 10]

7. Paragraphs 11-16 outline macro-control and systemic reforms: targeting nominal as well as real growth; shifting fiscal focus from deficit ratios to spending growth; using monetary policy to keep real interest rates low; reforming income distribution to favor low- and middle-income groups; accelerating household registration, rural land, and public service equality reforms; and comprehensively reforming fiscal, tax, and capital market systems. These include increasing direct state contributions to social security funds, improving public welfare spending, developing services (healthcare, tourism, childcare, etc.), and fostering private sector participation. [para. 11][para. 12][para. 13][para. 14][para. 15][para. 16]

8. The closing author note identifies Luo Zhiheng as the Chief Economist and Head of Research at Yuekai Securities. [para. 17]