Quick Thoughts: China leaps forward

Originally published in Stephen Dover’s LinkedIn Newsletter, Global Market Perspectives. Follow Stephen Dover on LinkedIn where he posts his thoughts and comments as well as his Global Market Perspectives newsletter.

Everywhere one looks, the “old world order” of globalization is facing challenges. The latest blow is the war in Iran and the disruption to Persian Gulf sources of hydrocarbons and related products. The forces reshaping the world economy affect every country and region. That includes China, which even before the outbreak of war in the Middle East, was taking steps to meet the challenges of a post-globalization world.

On March 12, China approved its 15th Five-Year Plan (FYP), which sets out a roadmap for its economic development and investment, as well as for social, educational, scientific and environmental objectives. While it is easy to dismiss such plans, with their historic roots in Soviet-style economic (mis)management, China’s FYPs since the 1990s have offered key insights into the country’s economic and geo-strategic priorities.

Here’s a precis of the 15th FYP followed by its potential investment implications:

• The FYP addresses de-globalization and national security by prioritizing domestic investment in manufacturing and supply chains. The plan’s core strategy promotes national (economic) security as the key objective in place of efficiency. The FYP emphasizes technology, self-reliance, domestic demand and sustainability as key drivers of growth in a more uncertain global economy.

• One target for greater self-reliance is energy. The plan stresses the importance of diversifying energy supply away from imported hydrocarbons (over one-third of China’s oil imports flow from the Persian Gulf) and toward domestically produced coal and renewables, particularly solar. The plan nods in the direction of security and expediency by easing targets on carbon emission reductions (from 18% to 17%) and foresees a substitution of coal for natural gas and petrochemicals as ways to reinforce China’s energy security.
• Core technologies are focal points. Artificial intelligence (AI), robotics, semiconductors, quantum computing and their supply chains are targets for investment, onshoring or friendshoring. In the plan, China targets a size for its digital economy value-added of 12.5% of gross domestic product (GDP) by 2030, nearly 30% higher than 2024 levels. Achieving that goal would add roughly US$700 billion to China’s economy by the end of the decade.¹
• Promoting the knowledge economy, including services. The FYP envisages growth in semiconductors, industrial machinery, advanced materials, biotechnology, life sciences and software services as new foundations for growth and productivity. By some estimates, the share of services in China’s GDP could rise by ten percentage points of GDP over the next five years, or by as much as US$2.5 trillion.² The FYP aims to increase the share of high-tech manufacturing from nearly 5% of GDP in 2025.
• Research and development (R&D) targets “new economy” sectors. The FYP targets R&D growth of 7% annually over the remainder of this decade, with a focus on integrated circuits, AI, bioengineering, quantum computing and nuclear fusion. 
• Modest gains in consumption. While the FYP notes the need to “significantly” increase consumption as a share of GDP (and foresees an increase in the share of consumption to 43%‒44% of GDP by 2030 from 40% today), re-balancing the economy remains a challenge given powerful headwinds of ongoing negative wealth effects from China’s property sector. Over the next few years and perhaps over a longer period than that consumer spending may lag overall real GDP growth in China.³
• Fiscal support. To support its goals, China is embarking on a modest fiscal expansion, which includes around a half trillion renminbi in local government support. Some projection show China’s general government budget deficit is likely to expand by around 1% of GDP in 2026.⁴

In terms of investment themes, China’s ambition to reboot its economy away from globalization and toward modern industrialization, business services, technology and greater energy self-reliance has important implications for investors.

Among them are the following:

• Basic materials: Building a more resilient energy infrastructure while meeting the massive demands for electricity (to power developments in AI) will underpin China’s growing demand for basic materials including copper (for electrification), steel and construction materials (for energy infrastructure).
• Semiconductors: China joins the United States and others in a race to develop the knowledge economy, whose foundations rest on integrated circuits. The global demand for semiconductors, and especially advanced computing chips, will likely remain robust.
• Energy: China, alongside much of East and South Asia, will be looking to diversify sources of crude oil, natural gas, petrochemicals and fertilizer inputs away from a current heavy reliance on Persian Gulf sources. We would anticipate greater investment in identifying, extracting and distributing hydrocarbons from West Africa, Mozambique, South America, Canada and Australia, among others. Energy services, shipping, LNG terminals and pipelines are poised to be the beneficiaries of a global re-thinking of energy supply and energy security.