China’s New 5-Year Plan Comes as U.S. Rivalry Heats Up. Watch for These Signals.

Analysts are keeping tabs on whether China sticks with a 4.5% or 5% target or moves away from giving one at all. (GREG BAKER/AFP via Getty Images)

Key Points

• China’s upcoming five-year economic plan is expected to prioritize domestic innovation, security, and stability amid rising U.S. rivalry.
• The plan will likely expand on the Made In China 2025 initiative, focusing on AI, robotics, and semiconductors.
• Policymakers face pressure to implement tangible measures to boost household spending and address the ongoing real estate downturn.

When the Chinese Communist Party gathers for its biggest annual political meeting this week, it is widely expected to unveil a five-year economic plan that doubles down on domestic innovation, security, and stability as its rivalry with the U.S. is heating up.

It is less clear if Beijing will offer tangible steps to spur household spending and revive the economy, which is still stuck in a rut and flirting with deflation because of aggressive spending in areas such as electric vehicles and solar.

The plenum, set for Oct. 20 to Oct. 23, brings together the party’s central committee to hash out its medium-term economic, technological, and political blueprint. Many analysts expect policymakers to build on the Made In China 2025 plan unveiled a decade ago, which spurred aggressive investment into areas including artificial intelligence, robotics, and semiconductors that are now at the center of the geopolitical rivalry with the U.S.

The five-year plan will be formally approved in March when the National People’s Congress meets. It is expected to be a continuation of recent efforts with Beijing, likely expanding the sectors it hopes to prioritize—a signal for investors looking to invest alongside the government.

“The previous five-year plan fostered Chinese emerging tech dominance; the new one will consolidate it,” says TS Lombard’s Rory Green.

That consolidation will fuel what many describe as a second China shock that hits advanced manufacturing and increases competition for a host of global companies in new areas.

Green thinks quantum and supercomputing, semiconductor design and manufacturing tools, and many AI segments will be in focus. Beijing is likely to stress domestic sourcing as it tries to become less reliant on the U.S. and others, especially for the semiconductor supply chain.

Investors will want Beijing to take a bolder stance to revive its economy, which is still sputtering amid a four-plus year downturn in the real estate market and battered business and consumer confidence. They will watch if policymakers move beyond talking about consumption to offering a viable plan for convincing Chinese households to spend more.

International Monetary Fund Managing Director Kristalina Georgieva said on Thursday that China faces a fork in the road: Continuing a growth model dependent on exports or reorienting toward domestic consumption.

To do the latter, it needs to firmly resolve trouble in the real estate sector and increase social safety nets. Instead of investing in industrial policy and spending 4% of GDP to support industries, Georgieva called on China to redirect that money toward safety nets so Chinese households don’t feel like they have to save as much.

“Anything that might boost the development of the consumption economy in the medium term is positive for investors,” says Kelvin Lam, senior China+ economist for Pantheon Macroeconomics.

While China may not release its target growth rate until March, analysts are keeping tabs on whether China sticks with a 4.5% or 5% target or moves away from giving one at all.

One potential negative for investors: “If there’s a strong focus on high-quality growth versus high-speed growth or an emphasis on debt-control or deleveraging, that would be a negative,” says Michael Hirson, head of China research at 22V Research.

Write to Reshma Kapadia at reshma.kapadia@barrons.com