MNI INTERVIEW: Manufacturing Share Of GDP In China 5-Year Plan

China is likely to highlight the need to maintain manufacturing’s share of GDP in its upcoming 15th Five-year Plan for 2026-2030 though setting a numerical target for the proportion of consumption to GDP is unlikely to be feasible, a high-level policy advisor told MNI, calling for experiments with downplaying the pursuit of GDP targets at the local government level.

“The large-scale production scenario, and the country’s complete industrial base is of great significance for maintaining a relatively stable economic growth and improving total factor productivity - a measure of productive efficiency,” said Liu Qiao, dean of Guanghua School of Management at Peking University.

While China faces the challenge of rebalancing its economy given the unsustainability of depending on external demand, this does not necessarily mean a decrease in manufacturing’s share of output, so long as industry upgrades and improvements are made in efficiency in line with policymakers’ focus on high-quality development, said Liu.

“Setting a number as a constraint would violate market rules, but a rapid decline is not wanted,” said Liu, noting that China’s proportion of manufacturing to GDP, which fell continuously to 26.2% in 2023 from a peak of 32.1% in 2011, should at least remain higher than 23% over the next five years. (See MNI INTERVIEW: China To Stabilise Manufacturing's Share Of GDP)

In some traditional industries with overcapacity in which China has achieved considerable cost advantages, more thorough market-oriented reforms can be expected, said Liu. Economic scale and efficient supply chains should give more leeway for raising salaries, which will increase household consumption and form a virtuous circle for long-term development, he added.

CONSUMPTION

However, setting a numerical target for consumption-to-GDP, which currently sits at 39%, is statistically problematic given that many service items cannot be included in national economic data, said Liu, adding that China’s consumption rate has been underestimated.

“There is little point in setting a numerical target, as it can be easily achieved by changing the statistical calibre,” said Liu, “whether the growth of residents' disposable income can exceed GDP growth may be a better reference.”

However, the emphasis on a GDP target will unavoidably distort local governments’ actions, prompting them to prioritise short-term growth by expanding investment, said Liu, warning of renewed overcapacity risks as local authorities flock to invest in artificial intelligence.

Policymakers are still likely to target an annual GDP increase of circa 4.7% for the next five years, but it is time to consider a trial of downplaying the target in some provinces with fiscal surpluses, by instead using a more comprehensive evaluation of local governance, such as by including residents’ sense of satisfaction, Liu argued. (See MNI INTERVIEW: China Five-Year GDP Target Likely 4.7% Average)

Liu estimated that consumption could reach 60% of GDP by 2035, by which time the country’s economy could double from its size in 2020, implying room for growth of about CNY80 trillion in consumption, adding to today's near CNY50 trillion in retail sales.

The key to filling this gap will be service consumption, which is currently constrained by supply-demand mismatch, lower income and high working hours, said Liu.

Liu said it was mistaken to pit consumption against investment, calling it a misunderstanding of the Chinese economy. China should focus on growing the economy by improving total factor productivity, which requires investment in technology as well as improvements to the structure and share of consumption, said Liu, calling for a boost to the TFP growth rate from 1.8% to over 2% by the end of the decade.