China’s 14th Five-Year Plan: Opening-Up the Business Environment

Since the unveiling of the “dual circulation development paradigm” by the Chinese government, there has been a great deal of speculation about the future of China’s opening-up. According to the Outline of the 14th Five-Year Plan for the National Economic and Social Development and the Long-Range Objectives Through the Year 2035 (the 14th FYP, in Chinese only) adopted in March 2021, the “dual circulation development paradigm” is the short form of the “new development paradigm with the domestic market as the mainstay and the domestic and overseas markets reinforcing each other”¹. While the domestic market serves as the core of development, the overseas market will be regarded as its important partner and the pair reinforce each other.

In fact, China has seen growth in its foreign trade and inflow of direct foreign investment (FDI) since the outbreak of Covid-19. In 2020, its total foreign trade volume in US dollars increased 1.5% on the year before, and its trade volume with key trading partners also showed an increase across the board - a rise of 6.7% year on year in total trade volume with ASEAN, 4.9% with the EU, and 8.3% with the US². In terms of FDI inflow, China attracted US$149.3 billion worth of foreign investment in 2020, a year-on-year growth of 5.7%³. This shows that China still maintains very close ties with global supply chains and value chains. This article takes a closer look at the 14th FYP in respect of China’s efforts to improve its business environment and boost opening-up, in order to help Hong Kong companies prepare their future operation strategies ahead of time.

When quoting the text of the 14th FYP, this article adopts the following format⁴: (Part No. Chapter No. Introduction/Section/Table No.). Thus, “(1.1.1)” refers to Part 1, Chapter 1, Section 1; “(3.11.Table 5)” refers to Table 5 of Chapter 11, Part 3; and “(3.8.Introduction)” refers to the Introduction of Chapter 8, Part 3, and so on.

Stable and Consistent Fiscal and Monetary Policies​​​​​​​

Over the past two years, the Chinese government has reduced taxes and fees by a total of RMB2 trillion per annum⁵. The policies set out in the 14th FYP show that the government will continue to relieve the burdens of taxes, fees and market fluctuations on businesses through more optimal policies to reduce taxes and fees. However, the money supply and scale of lending will remain prudent. Monetary policies will focus on serving the real economy and preventing systematic financial risks to avoid an overheating economy brought on by a loose monetary environment. Short-term stimulation of market demands through fiscal and monetary policies is not considered the right planning direction to be pursued by the government.

Delegating Power, Streamlining Administration and Improving Government Services

Another fundamental factor in the strength of a business environment is the integrity of the legal regime and related systems. Over the next five years, the Chinese government says it will continue to optimise its legal regime and related systems. China has attached great importance to the establishment of intellectual property (IP) protection systems in recent years and has updated a number of related laws, such as the Trademark Law, Patent Law and Copyright Law⁶. As stated in the 14th FYP, the Chinese government will, as well as enacting legislation, strengthen law enforcement efforts by “implementing a strategy of building a powerful IP nation; putting in place stringent IP protection systems; improving the law and regulations relating to IP protection; speeding up the enactment of IP protection legislation for new areas and new business forms; strengthening the judicial protection, administration and law enforcement of IP; improving the arbitration, mediation, notary public and assistance systems of IP cases; and optimising the punitive damages system for IP violation with an increase in the scale of damages to such violation”. (2.7.2)

To deal with the new forms of business derived from various new technologies, the government will “explore the possibility of setting up regulatory frameworks for self-driving, e-health, financial technology and smart distribution; and improve the related law, regulations and ethics assessment rules” (5.18.2). During the 14th FYP period, the Chinese government will take more intensive steps to promote scientific research and development, improve the consumer market and promote the prosperous development of the services industry. The implementation of improved IP protection systems and regulatory frameworks for new forms of business should facilitate innovation in society.

Moreover, the government will continue to improve the standards of government services and rationalise the government position in the market in order to improve China’s business environment. Over the past few years, the Chinese government has made positive progress on reforms concerned with delegating power, streamlining administration and improving government services, and these reforms will be pushed forward further during the 14th FYP period. Listed below are the major policies outlined in the 14th FYP in relation to these reforms:

It should be noted that among the 123 restricted items in the negative list for market access (2020 edition), some 80 items are related to the services industry. Since the government clearly states the need to focus on the services industry in the 14th FYP by relaxing access restrictions further, more approval processes for services industry access are expected to be streamlined in the near future.

Ongoing Improvement to Foreign Investment System

The foreign investment system is the link between the domestic and overseas markets. Drawing in more quality foreign investment, projects and technologies will help to enhance the competitiveness of China’s domestic economy. This will help achieve the goal of “allowing the domestic and overseas markets to reinforce each other”, as stated in the 14th FYP. (1.2.3) Over the past few years, the Chinese government has been increasing openness and strengthening the protection of foreign investors’ interests by setting up a number of pilot free trade zones, implementing the negative list system for foreign investment access and enacting the Foreign Investment Law. During the 14th FYP period, the Chinese government will continue to optimise the foreign investment system in order to bring more business opportunities to foreign investors.

The 14th FYP states that the Chinese government will “optimise pre-establishment national treatment plus negative list administration system for foreign investment, further shorten the negative list for foreign investment access, implement the post-establishment national treatment and promote fair competition between domestic and foreign enterprises” (12.40.1). In the process of relaxing access to foreign investment, one of the main focuses will be to open up the services industry further. The policies related to this include the following:

It can be seen from these policies that the government not only intends to expand the participation of foreign investment in the domestic market for the service industries, but is also stressing the connectivity and co-operation between the domestic and overseas markets.

As of June 2021, the Chinese government had set up 21 pilot free trade zones, and the construction of the Hainan Free Trade Port is also in full swing. During the 14th FYP period, China will continue to implement policies pertaining to the free trade zones and free trade port. According to the 14th FYP, the Chinese government will “improve the strategies for pilot free trade zones and entrust them with more autonomy in reforms; further its exploration of pioneer, integrated and differential reforms and actively replicate and promote the achievement of innovative systems” (12.40.2). The government will also “steadily push forward the construction of the Hainan Free Trade Port, moving towards the direction of ‘zero tariff’ for the trade in goods and ‘access for entry and operation’ for the trade in services to promote trade liberalisation and facilitation; substantially relax market access; fully implement the ‘minimal government approval’ system for investment; set up trial points for cross-border securities investment and financing reforms and for safety management of cross-border data transfers; implement more liberal policies for talent, border entry and exit, and transportation; enact and promulgate the Hainan Free Trade Port Law; and introduce the free trade port policies and related systems with Chinese characteristics”. (12.40.2) The Hainan Free Trade Port Law was approved by the Standing Committee of the National People’s Congress and came into force on 10 June 2021. Hong Kong companies can actively explore the business opportunities presented by the various free trade zones and the Hainan Free Trade Port.

Regarding the co-operation between the service industries of mainland China and Hong Kong, the 14th FYP states that the establishment of the Guangdong-Hong Kong-Macao Greater Bay Area (GBA) will “expand the mutual recognition of professional qualifications between the mainland and Hong Kong / Macao, and further the alignments for related regulations and mechanisms in strategic fields”. (9.31.3) This will give Hong Kong’s professional sectors more room to develop their business on the mainland. In fact, the measures have already been put into practice even before the promulgation of the 14th FYP. In October 2020, Qianhai in Shenzhen released documents⁷ to the effect that it would serve as a pilot point allowing Hong Kong enterprises and professionals with corresponding qualifications in construction and related engineering consultancy to provide services to mainland enterprises directly after record-filing. Under the policy framework of the 14th FYP, more policies on mutual recognition of professional qualifications between the mainland and Hong Kong / Macao are expected to be introduced through various platforms such as the Guangdong Free Trade Zone.

Increasing Value-Added of Exports and Opening Up New Markets

The 14th FYP stresses the mutual reinforcement between the domestic and overseas markets, indicating that the Chinese government is expecting to improve both the quality and quantity of China’s participation in international trade. The 14th FYP spells out the following policies:

The data available suggests that measures to “intensively develop traditional export markets, open up emerging markets, expand the trading scope with neighbouring countries” and “promote the transformation and upgrading of processing trade” as emphasised in the 14th FYP have become the development trend for China’s trade over the past few years. 2020 has seen ASEAN replacing the EU and the US as China’s largest trading partner. In particular, total trade volume with Vietnam, an ASEAN member, has grown by more than 100% to US$192.3 billion since 2015. Nevertheless, China’s total trade volume with its traditional trading partners – including the US, Japan, South Korea, Germany and Australia – has still shown an overall increasing trend over the past five years. At the same time, its total trade volume with the emerging markets of Brazil and Russia has also been rising steadily.

In terms of processing trade, the level of general trade exports as a proportion of total export volume has been growing in recent years. In 2015, general trade exports comprised 53.4% of total export volume whereas processing trade exports (the aggregate of processing and assembly trade with supplied materials and processing trade with imported materials) had a 35.1% share. By 2020, the contribution of general trade to total export volume had risen to 59.3% while that of processing trade had dropped to 27.1%.

The direction for foreign trade development set out in the 14th FYP is the consolidation and extension of recent development trends in foreign trade. The position expressed in the 14th FYP has important implications for foreign trade operators - firstly, the Chinese government intends to step up rather than reduce its trade exchanges with traditional markets; secondly, the Chinese government would like to increase the value-added of goods to be imported or exported, indicating its desire to import and export more high-end quality commodities; thirdly, the Chinese government wants to actively open up emerging markets and explore the opportunities presented by new trading modes; and fourthly, the Chinese government will support foreign operators exploring new opportunities for operation and investment in China. This policy blueprint for upgrading the quality of its foreign trade suggests that the Chinese government intends to step up its ties with global supply chains and value chains still further in the next five years.

Furthering Development of Global Trade Network

In future, China will not only conduct more commodity trade with other countries and support foreign investment in China, it will also further the development of its global trade network through overseas investment and the execution of free trade agreements. In recent years, projects under the Belt and Road Initiative (BRI) have achieved specific results, and China will actively promote the quality development of the BRI in the near future. According to the 14th FYP, projects under the BRI will “follow the principles of extensive consultation, joint contribution and shared benefits; uphold the concepts of going green, openness and integrity; step up collaboration; enhance security safeguards; and promote mutual development.” (12.41.Introduction). This implies that the BRI development policy of strengthening the connectivity of infrastructure facilities, developing co-operation in third-party markets, and following international practices and principles of debt sustainability, as set out by the Chinese government over the past few years, will continue to be pursued during the 14th FYP period.

At the same time, China will strive to build up a high-standard network of free trade agreements. The 14th FYP clearly states that China will “implement an upgraded strategy for free trade zones and build up a high-standard network of free trade zones that faces the whole world” (12.42.2). To achieve this target, China will push forward the implementation of the Regional Comprehensive Economic Partnership (RCEP) agreement signed in December 2020, “actively consider joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)”, and “promote the discussion on executing more high-standard free trade agreements and regional trade agreements”. (12.42.2)

As at December 2020, China had signed 19 free trade agreements with 26 countries and regions. Other free trade agreements under negotiation include the China-Japan-South Korea Free Trade Agreement, the China-Norway Free Trade Agreement and the China-Israel Free Trade Agreement⁸. Through overseas investment and the execution of free trade agreements, China is looking to develop its global trade network further, which will help reduce the barriers encountered when engaging in international trade, and in turn facilitate the smooth operation of the overseas market in the “dual circulation development paradigm”.

Conclusions: Implications for Hong Kong Companies

From the table on Mainland China’s Trade with Major Trading Partners and Their Shares, 2015, 2019 and 2020 (see above), we can see that Hong Kong’s share of mainland China’s total trade has dropped from 8.7% in 2015 to 6.0% in 2020. However, this does not mean that Hong Kong’s role in the mainland’s foreign trade has diminished. Data regarding Hong Kong’s re-export trade during the same period shows that the value of re-exports of goods from Hong Kong to the mainland has been growing in recent years, from HK$1,916 billion in 2015 to HK$2,302 billion in 2020, and the share of its total re-exports that was accounted for by the mainland also increased from 53.8% to 59.3% over the same period (the share in 2019 was 55.6%).

These figures reflect the current participation of mainland China in global supply chains. At present, mainland China is no longer a mere export source of finished goods, but is also an import centre for numerous types of raw materials, intermediate goods and consumer goods. The entrepot function and role of Hong Kong has also evolved from being a main distribution hub of export goods manufactured on the mainland to a regional transit centre for goods destined for the mainland and overseas. This is the case with service trade as well - Hong Kong has now become a regional service trade centre. It’s not only mainland enterprises that can “go global” through Hong Kong, other enterprises can also explore the massive business opportunities presented by the mainland through Hong Kong and the GBA.

In view of mainland China’s ongoing optimisation of its business environment and its closer ties with global supply chains and value chains, Hong Kong companies may want to consider planning their future business strategies in the following ways. Businesses with their own IPs such as trademarks and patents should pay close attention to mainland China’s development and enforcement of its IP protection system. Those engaged in professional and financial services should look closely at the latest developments in the connectivity between the mainland and Hong Kong markets, the mutual recognition of professional qualifications within the GBA, and the establishment of the administration system for the cross-border service trade negative list. They can also make use of the Hong Kong platform to help mainland enterprises, technologies and standards “go global”. As for manufacturers, traders and logistics industry players, they should actively explore the business opportunities presented by the neighbouring markets of China and the emerging markets. Alternatively, they may consider developing business in the import and transportation of quality consumer goods and equipment.

In short, the Chinese government is working to upgrade its business environment and expand its scope of openness to the outside world so that the market in mainland China will become more competitive in the global arena. With an understanding of the policies set out in the 14th FYP, Hong Kong companies can try to provide quality goods and services that keep abreast of the times and actively open up new markets, in order to take advantage of the various business opportunities presented by the plan.

¹ For an overall analysis of the 14th Five-Year Plan, please refer to China’s 14th Five-Year Plan: Key Policies.

² Source: General Administration of Customs

³ Source: World Investment Report 2021, United Nations Conference on Trade and Development, June 2021.

⁴ As of July 2021, the Chinese government had not released an official English version of the Outline of the 14th Five-Year Plan for the National Economic and Social Development and the Long-Range Objectives Through the Year 2035 (14th FYP). The English version provided here is for reference only.

⁵ Source: Report on the Work of the Government, 2020 and 2021 editions.

⁶ For a more thorough understanding of the development of China’s IP protection regime, please refer to China’s IP Protection Regime: The Inside Track.

⁷ Record‑filing measures for allowing professional firms from Hong Kong’s construction and engineering sector to practise in the Shenzhen Qianhai Shenzhen‑Hong Kong Modern Service Industry Co-operation Zone (Shen Qianhai Gui No.8 [2020]) (《深圳市前海深港現代服務業合作區香港工程建設領域專業機構執業備案管理辦法》(深前海規[2020]8號))

and

Record‑filing measures for allowing qualified practitioners respectively from Hong Kong’s construction and engineering sector to practise in the Shenzhen Qianhai Shenzhen‑Hong Kong Modern Service Industry Co-operation Zone (Shen Qianhai Gui No.7 [2020]) (《深圳市前海深港現代服務業合作區香港工程建設領域專業人士執業備案管理辦法》(深前海規[2020]7號))

⁸ Source: Ministry of Commerce