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China’s supply chain upgrades have strengthened its hand in negotiations with the United States and are expected to bolster its competitive edge over the next five years – though the country must prioritise domestic demand to sustain innovation and avoid worsening deflation, according to an influential economist. “China is probably the only country that is negotiating in a tough way, almost on an equal foot[ing] versus [the] US,” said Robin Xing, chief China economist at Morgan Stanley, in an interview on Thursday. “That’s backed by China’s rising supply chain competitiveness and trade dominance”, he added, pointing to its near monopoly in crucial exports like lithium batteries and rare earths. “In the next five years, China probably wants to continue to enhance what they have achieved,” Xing said. Beijing on Tuesday released proposals for the 15th five-year plan – its socio-economic blueprint that outlines policy priorities for the next half-decade. Industrial and technological development featured prominently, with policymakers pledging to make a “decisive breakthrough” across the supply chains of critical industries – including semiconductors, infrastructure software and biomanufacturing. The proposals also called for maintaining a “reasonable” share of manufacturing in the economy while building a “unified domestic market” to underpin a new growth model. The central government vowed to tighten oversight of local economic initiatives, curb “race-to-the-bottom” competition and improve frameworks to evaluate performance, fiscal policy, statistics and benefit-sharing to support greater market integration. According to Xing, the document showed Beijing is recalibrating its industrial strategy to strike a balance between supply and demand – a likely shift from the current model, where local authorities offer subsidies to attract as much investment as possible, mainly to meet performance targets and boost local tax revenues. This latter approach risked keeping inefficient firms afloat and worsening overcapacity, he added. “If [Beijing] leans heavily into the supply-centric policy mix, it’s going to make the current deflation problem more persistent,” Xing warned, adding that “deflation is partially contributed [to] by the prevailing supply-demand imbalance.” “That’s why we are excited to see in the five-year plan statement that they are making some gradual pivot, trying to rebalance towards consumption.” China’s prior focus on bolstering industrial and innovation capacity through supply-side measures is now evolving into a more integrated strategy that connects supply- and demand-side policies to sustain innovation-driven growth, Xing said. “If you have too little demand, firms will be racing to the bottom – that’s not ideal for innovation and R&D.” Despite being one of the world’s largest markets, China continues to grapple with weak consumer confidence and subdued household spending. Initiatives such as the trade-in programme – which encourages the purchase of home appliances, vehicles and digital goods – have not fully revived sentiment. In its new proposals, Beijing acknowledged that economic development remains “unbalanced and inadequate”, with domestic demand still insufficient. Consumption as a percentage of gross domestic product is only 40 per cent, partly because people save too much Robin Xing, Morgan Stanley To create a “virtuous cycle” between consumption, investment and production, policymakers pledged to increase investment in livelihood-related sectors, using “new demand to drive new supply, and new supply to create new demand”. Xing said the proposals showed that China would “definitely focus more” on boosting consumption. This could include strengthening social welfare to reduce household concerns and encourage spending. “Consumption as a percentage of gross domestic product is only 40 per cent, partly because people save too much”, he said, citing concerns about unemployment, education, healthcare and retirement. He also suggested reforms that would make local governments more reliant on direct taxes – such as those on consumption, corporate income and personal income – incentivising them to promote household spending rather than just factory output. “China has focused on investment in infrastructure and manufacturing in the last 20 years, but now they are shifting away from investing in physical infrastructure to investing in human capital,” Xing said. “That’s a good pivot.”
