Our world is undergoing profound changes, which presents important opportunities for China. In this context, China must deepen reforms, open up wider to the outside world, further open up its economy, and develop market-based rules in line with international trade and investment practices.

1. Once-in-a-Century Changes

China’s 14th Five-year Plan period (2021-2025) coincides with profound changes on the world stage.

Parallel to the relative decline of advanced economies in the Western world, developing economies - represented by China - are steadily on the rise. Such a tectonic shift started in 1978 with China’s reform and opening up, culminated in the ongoing China-US trade conflict, and is set to evolve and deepen during the 14th Five-year Plan period and beyond.

First, important changes are taking place internationally. International competition is, essentially, institutional competition. On the world stage, China and the United States have started to compete in all domains, including economy, national strength, science and technology, cybersecurity, and global governance. Second, a new industrial revolution is energizing global industrial development and division of labor. Advanced economies, led by the United States, continue to reconstruct the global supply chain and innovation networks to exclude China and block its rise up the value ladder. Industrial automation and smart robotics are eroding China’s low-cost labor advantage, and competition from other emerging economies such as Vietnam weakens China’s pivot position as the link between advanced and developing economies in international trade. Third, the world economy is shrouded in growing uncertainties. The prospect of economic stagnation is all too real. Protectionist headwind, coupled with diminishing labor supply and stagnant production technology, is lowering potential growth rates worldwide. Amid uncertainties in global trade, international direct investment is very unstable. Global debt levels are rising. In emerging economies, in particular, financial market risks are accumulating. Economies have seen their growth cycles diverge. Monetary policies set by leading advanced economies have generated significant negative spillover effects.

The 14th Five-Year Plan period presents China with a critical opportunity to take center stage in world affairs, to participate in reshaping the international order. Amid the complex international environment, we must develop an open economy, be proactive in setting international trade rules, and contribute Chinese wisdom and strength to an open, inclusive and balanced international economy. This not only reflects China’s stature as a responsible leading nation, but it also helps China broaden its own development space.

2. More Room for China to Integrate into the World Economy

After four decades of reform and opening up, China has become enmeshed in the global economy; having benefited from globalization’s dividends, China has contributed more than one third to world GDP growth. Yet as the second largest economy, China still has room to further integrate into the global economy. That is why we should further open up our economy at all levels during the 14th Five-Year Plan period, which requires taking the following steps:

- Strive to develop trade in services: In 2017, China accounted for 6.4% of the world service trade - roughly half of its share in the goods trade. Globally, however, the service trade grew 60% faster than the goods trade.

- Encourage Chinese companies to go global: Despite growth in overseas business revenue, Chinese companies generate less than 20% of their revenue from overseas operations. In comparison, this percentage is as high as 44% for S&P 500 companies. Among the 100 most valuable brands in the world in 2018, only one was a Chinese company.

- Make long-term efforts to globalize its financial system. In 2018, foreign capital only comprised around 2% of China’s banking system and 2% and roughly 6% of China’s bond and stock markets, respectively. In 2017, China’s aggregate capital inflows and outflows, including foreign direct investment, loans, bonds, equities and reserve funds, were only around 30% those of the United States.

- Increase its right of discourse in global governance. At key international organizations such as the United Nations, the WTO, the World Bank, the International Monetary Fund (IMF), APEC and G20, China’s influence has been on the rise in recent years. Yet advanced economies still dominate these international and multilateral organizations. In the 14th Five-Year Plan period, China should strive to open wider to the rest of the world and integrate into the global economy, paying close attention to the pace, structural choices and risks associated with the integration process. Specifically, China should be cautious about potential disruptions in the global value chain and innovation networks; protect its overseas investment; enact structural reforms to meet compliance requirements; enhance national security; conduct anti-trust reviews on foreign investment; and put together a list of unreliable entities.

3. Open Up Wider to the Outside World

In the 14th Five-Year Plan period, China must open up wider to the outside world. China should (i) optimize the spatial layout of external openness by developing free-trade zones and free ports, (ii) relax market access by allowing foreign capital to take a controlling stake or operate solely-funded businesses in more sectors, and (iii) facilitate and liberalize trade and investment by granting pre-establishment national treatment to foreign capital on the basis of implementing the negative list.

These new elements highlight the importance of institutional openness in terms of rules, regulations, management and standards in the free flow of goods. In his message to the Central Economic Work Conference in 2018, General Secretary Xi Jinping called for institutional openness as a linchpin of further reforms at a deeper level, which requires modernizing national governance.

3.1 Foster a Business Climate That Respects Market-based Principles and the Rule of Law

The World Bank’s Doing Business Report 2020 released in October 2019 ranks China 31st for ease of doing business, up 15 places from the previous year. For two straight years, China was among the top ten economies with the most significant improvement in the ease of doing business. China has enacted the Regulations on Optimizing the Business Environment, which took effect January 1, 2020. Further steps should be taken to create a pro-business environment, open up markets, improve the “pre-establishment national treatment plus the negative list” system, better protect intellectual property rights, and adjust subsidies and environmental standards. China should also reform its tariff system and increase transparency in government procurement in line with trends toward zero tariffs, zero subsidies and zero barriers. China should also enact new market-based reforms underpinned by a pro-competition policy. Industrial policies that block fair competition should be replaced by market-based solutions. SOE reform should follow the competition neutrality principle. Industrial policymaking should be more inclusive and functional. Market supervision should shift priority from ordinary market activities to fair competition.

3.2 Open Up to the Outside World at All Levels

China’s growth momentum should come from economic openness, focusing on the following priorities:

- Increase trade volume: We should expand trade in services, open up the Chinese market, and import quality goods and services from the rest of the world via the China International Import and Export Expo (CIIE) and other trade platforms.

- Improve the quality of opening up: We should increase the value-added of Chinese exports, and optimize the structure and pattern of trade in capital and consumer goods, promote new business modes such as cross-border e-commerce, and offer digital trade services; develop high-tech and high value-added service outsourcing, encourage foreign investment in emerging industries, technology sectors and modern services; step up trade cooperation with countries involved in the Belt and Road Initiative (BRI), and optimize the international market and domestic regional layout of trade.

- Enhance opening up systems: We should promote institutional innovations through pilot free-trade zones, deepen administrative reforms, and cut tariff and institutional costs; continue to downsize the negative list of foreign investment, facilitate trade and investment, and create sound investment policies and services for the Belt and Road Initiative; meet international rules, develop a fair, reasonable and transparent system of international economic and trade rules, and reform the World Trade Organization (WTO).

3.3 Open Up the Service Sector

In the 14th Five-Year Plan period, we should fully open the service market, unify Chinese and international service standards, mutually recognize service personnel qualifications, and lower service trade barriers. We should create bilateral and multilateral free-trade networks for the service trade, leveraging opportunities from China-Europe, China-Japan-South Korea and Asia Pacific regional integration. We should increase financial market and institutional openness, accelerate the opening up process in the telecom, education, healthcare and cultural sectors, and relax restrictions on the equity ratio of foreign capital. We should encourage multinational companies to establish regional headquarters and R&D, procurement and financial management centers in China, and conduct R&D and commercialization with Chinese research institutions and companies.

3.4 Reshape Global Economic and Geopolitical Landscapes through the BRI

The BRI should extend more aid to developing countries, especially the least developed countries (LDCs) and narrow development gaps between the South and the North. Under the BRI, China should advance industrial cooperation in tandem with trade in services, and protect its investment in BRI countries in accordance with market-based principles and rules. The BRI should contribute to the internationalization of renminbi. Through the BRI, we should seek economic cooperation with relevant countries and thus contribute to their national development strategies, focusing on key countries and projects. In a nutshell, the BRI should follow the principles of mutual consultation and participation for win-win results, promoting policy consultation, infrastructure connectivity, trade facilitation, financial intermediation, and people-to-people exchanges to enhance land and maritime trade ties that reshape global trade and geopolitical patterns.

3.5 Free-Trade Zones Should Prepare for the Reshaping of International Rules

China has inked 17 free-trade deals with 25 countries and regions in Asia, Latin America, Oceania, Europe, and Africa. In 2019, 15 member states concluded negotiations over the Regional Comprehensive Economic Partnership (RCEP) - the world’s largest trade bloc of its kind. For the first time, China has adopted a negative list for negotiating a China-Japan-South Korea free trade zone. China should benchmark international trade rules, expedite the development of pilot free-trade zones, and break new ground in opening up. We should create free-trade zones with high standards, promote the new Lingang area of the Shanghai Free Trade Zone as an example, and grant more reform autonomy to the pilot free-trade zones. Steps should be taken to develop policy and institutional systems for the Hainan free trade port (FTP), and to create free-trade ports with a business-friendly environment. We should establish free-trade zones with major world economies, broaden the coverage of free-trade zones, and develop a network of free-trade zones with high standards in BRI regions.

3.6 Take an Active Role in Transforming the Global Governance System

An open economy requires a proper match between rights and responsibilities, transparent international rules, and fair global governance. Despite attempts to exclude it, China should take an active role in global governance, contribute to the improvement of international trade rules, and develop a rules-based multilateral trade system together with the global community. We should reform the WTO to safeguard its core values and principles such as openness, inclusiveness and non-discrimination, and protect the interests and policy space of developing countries.