Premium: 14th Five-Year Digital Economy Development Plan
Key takeaways, key indicators and 6 pages of notes on the plan
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My WeChat groups have been buzzing with the latest policy guidance 14th Five-Year Plan, discussing what it means for the digital economy. Here’s the complete document for your further reading pleasure. Here's an overview from a previous newsletter about why we're so into this:
“It's the Chinese government's wishful blueprint. It's a guidance document that's put together through rounds of discussions and buy-ins from provincial, municipal and state levels. Still, if any startup or large corporations release the OKRs, there's no guarantee they will all happen. The history of Chinese Five Year Plans (FYP) is littered with their failures as much as their successes.” - Overview of the 14th Five Year Plan
This specific policy guidance is focused on the Chinese digital economy and therefore well worth paying attention in order to understand the CCP’s thinking for technology regulation, key technology development areas and the role of government in supporting all of this.
My notes focus around answering the following questions:
What are the implications for the future regulatory environment for Chinese platform companies and other areas of Chinese tech?
What are the critical focus areas for Chinese tech in the coming years?
While my notes are not as eloquent as my typical writing, that’s partly a function of the turgid underlying policy document (which I quote from in parts). This is a guidance framework similar to the Five-Year Plan and localised for each region. The vagueness and aspirational tone are intentional as it allows for more regional interpretation, but the key indicators that tie it all together are what we should be focusing on.
Key takeaways
The anti-monopoly and other regulations ensuring fair competition will continue throughout 2021 to 2025 - it seems like there’s significant intent to bring in rules of law to this domain in order to remove systemic risk. More rules around data safety and fair competition seem inevitable given the tone of this document.
Implications:
More comprehensive laws and regulations are coming that will specify the limits of platforms and promote consumer and worker welfare.
The exact methodology for how consumer welfare and fair competition will be guided is still being defined, leaving a certain margin of error for interpretation.
Fintech will be seen as finance by another name and will be regulated as such.
Given the indicators around transaction growth and e-commerce, I also do not think the government wants to see platforms completely destroyed. Who’s going to deliver the growth if everyone’s stagnating?
Timing will be the tricky part and I have no insight here.
Platform players specifically are asked to step up and become de facto institutions - Tech giants are being asked not what their country can do for them but what they can do for their country. In the guidance plan, the tech players are asked to help with sharing data for future data exchanges and to open their technology stack to help SMEs and other industries digitalise.
Implications:
I don’t think platforms will be nationalised, though their functions could become somewhat grey. They are faced with a carrot and stick situation. For instance, they could be asked to help Chinese industries digitalise through DingTalk, Tencent middleware, PDD agricultural investment fund and Meituan’s new retail functions, and not to double down on their current consumer platforms, as there are implications for consumer welfare encroachment.
I’m sanguine about this, as I think all Chinese consumer tech platforms are being offered a chance to have a second leg as a B2B company. They have the government’s support if they go forward with it. Put another way; they also have a cornered resource since China will not be asking AWS, Google or Salesforce to help with China’s digital transformation anytime soon.
Software and manufacturing cloud is front and centre of policy. It receives strong tailwinds and platforms have a role to play - What gets measured gets done, and in the indicators for the Digital Economy Five-Year Plan, the size of the software and IT service industry is being asked to grow by at least 72% 2025.
Implications:
The focus for manufacturing industries seems to be the digitalisation of the supply chain I expect many startup players in this space to accelerate through funding and government support in the coming years. More on this in the State of Chinese Cloud part I
Agricultural tech is also seen as a top priority given the frequency it gets mentioned (seven times in the document), it is still a 13.8 trillion RMB ($2.1 trillion) that employs 25% of the Chinese workforce.
Open-source software gets several shoutouts as a way to harness decentralised software manpower. This has also followed what I’ve observed in the VC community, opensource in China has been having a hot year in 2021. Now with government backing, expect Chinese open-source to go mainstream in the coming years. I’ll be posting more frequently on this topic too.
The vision of “Data as a factor of production” gets executed - China’s population and existing e-commerce industries mean it has a comparative advantage in data. The Digital Economy FYP gives significant space to make sure the vision becomes a reality. While thorny issues of how data ownership and effective usage are still unresolved, it is clear that these issues will reach a landing point soon given the weight of the emphasis put here.
“A country can unlock credible growth and competitive advantage by harnessing a resource such as data or land through a market-based allocation mechanism.” - Data as a factor of production
Co-ordination among regulators is an issue that is noted and hopefully being addressed - Speculative. Still, given Section 8.1’s pontification on coordination between organisations and what I’ve picked up through the big tech grapevine, the CCP realise the sequencing of regulations is an issue, especially in terms of optics to western investors. On this, I hope they will make further progress and not besiege the public with bombshell announcements too quickly. It’s hard to manage, though, given this is a new power territory where up-and-coming organisations can make their mark by being visible with regulatory releases.
Fraught relationship with capital and financing - while the guidance plan notes curbing the excesses of capital, it also highlights the need to give additional funding to fledgling industries. The government’s solution so far seems to be local government funds, but there’s the risk of misallocation when there are fewer market forces at play. There’s still the unresolved policy determination of what constitutes effective capital usage, and we’re effectively awaiting further guidance here from the central committee.
China’s drive for self-sufficiency will see many homegrown champions in the deeptech fields - Nothing new here. Still, this trend is here to stay from mentions of calling for more innovations on AI, semi-conductors, blockchain, EV, and others. We’ll continue to see the domestic replacement for foreign technology over the next few years.
The digitalisation of government services might be the fuel that drives Chinese software - This is somewhat speculative, but I do believe because of the absence of mid-sized enterprises that are the early adopters of software in the west, government organisations can be a key driver of adoption in China. They could be the first purchasers of technology to disseminate further digitalisation throughout Chinese businesses. This means the talks of smart government have implications for a whole host of startups and tech giants alike.
Key Indicators
Similar to the 14th Five-Year Plan, the criteria with measurements next to them are the key focus.
Summary
China’s making good progress in growing the digital economy (to 7.8% of GDP in 2020), adopting 5G and cloud for consumers and business, creating new business models, smart government and international cooperation in examples like ‘Silk Road E-commerce.’
Concerns are dependencies on other industrial and supply chain entities, digital silos between different industries, regions and groups, lack of effective usage of data, and the need to improve digital economy governance.
Developing a digital economy is a strategic choice to leapfrog and adopt the next industrial transformation.
Data is the core element for development, but coordination and effective usage will be critical in unlocking its potential
Digital services are an essential tool to improve the quality of life for citizens.
Standardising sustainable and healthy growth is a core need for the development of the digital economy — and the traditional development path is seen as ‘unbalanced, insufficient and non-standard’
Guiding principles:
Build a new development pattern, promote high-quality development, coordinate development and security, coordinate domestic and international, take data as the key element, focus on the deep integration of digital technology and the real economy, strengthen the construction of digital infrastructure, improve the governance system of the digital economy, and promote digital industrialisation and industrial digitisation in coordination, with the objective that it can transform and upgrade traditional industries and cultivate new industries.
Basic principles:
Innovation-led development - focusing on self-reliance and increasing digitisation of industries that would increase total factor productivity.
Data empowered development - leveraging China’s massive data resources, focusing on breaking silos and effectively connecting production, distribution, circulation, and consumption.
Fair competition, safety and order - Respect competition, strengthen anti-monopoly measures, and prevent capital’s ‘disorderly expansion’. Improve market supervision and macroeconomic policies that improve development and adhere to safety’s ‘bottom line’. Promote ‘healthy and sustainable’ development of platform economy.
Market allocation alongside systemic planning - let the market play the decisive role in allocating resources but allow systemic planning to coordinate collaboration.
Development goals - key indicators for the plans
Further development of the market for data - data as a factor of production is used to promote the entire value chain of R&D, production, circulation, service and consumption. Data markets are established with fully formed data rights, pricing, and transactions. Generators of data are also equally compensated for their time.
Digital transformation of the industries - manufacturing cloud and agricultural digitalisation processes are well underway. Promoting green development in the process
Inclusive digital public service and upgrading of e-government.
An improved and mature digital economy governance system - A unified digital economy government framework and rules system has been established. With coordination between regions and departments and focus on the rule of law.
Digital infrastructure
Build out key physical infrastructure - Build out gigabit optical fibre network and 5G network infrastructure. Promote 6G and its international standardisation. Encourage space and satellite communication networks. Improve the adoption of the Internet of Things (IoT) in industrial manufacturing, agricultural production, public services, emergency management and other fields.
Develop cloud-network and computing networks in the following ways
Construction of a national integrated big data centre
Build out regional data centres in Beijing-Tianjin-Hebei, Yangtze River Delta, Guangdong-Hong Kong-Macao Greater Bay Area, Chengdu-Chongqing Shuangcheng Economic Circle, Guizhou, Inner Mongolia, Gansu, Ningxia and other regions.
Data centres will also integrate relative algorithms, data platforms and applications to facilitate smart cities, government services and intelligent manufacturing, autonomous driving and NLP.
Digitalising the infrastructure of industries - Digitalise and improve the networking of the following sectors; agriculture, manufacturing, energy, transportation, water conservancy, logistics and government.
All while being environmentally friendly.
Data as a factor of production
Increase the supply of high-quality data - support market entities in collecting and managing data (focusing on ‘labelling, desensitisation, aggregation and analysis’). Create data standards and improve data management to facilitate a data-sharing market. Build a unified national open data platform.
Marketisation of data - establish market rules and governance protocols for data exchanges, with a crackdown on black-market transactions.
Create a new market mechanism for the data exchange market - encourage industries to create data utilisation models and foster data opening, licensed development and authorised applications.
Digital transformation of industries
Digital transformation of enterprises - Digitalise the operations of an enterprise and focus on data-led decision making and collaboration inter and intra organisations across the supply chain. Special campaign to digitalise SMEs, especially online marketing, remote collaboration, digital office and digitised production lines. Encourage and support internet platforms and leading enterprises to open up digital resources and capabilities based on their own advantages and help traditional enterprises and small and medium-sized enterprises achieve digital transformation.
Digital transformation of key industries - Focus on agriculture, specifically around production, processing, sales, logistics and other linkages—manufacturing across its life cycle from R&D, design, manufacturing, operations and marketing. Encourage SMEs and intelligent manufacturing. There’s also a call out for digitalising the energy sector.
Create industrial parks and clusters - create specialised industrial parks that can be the hubs of innovation.
Cultivate the digital transformation ecosystem - invest in service integrators and other technical consultancies who can help with transformation execution.
Core technology upgrading
Focus on frontier technology - sensors, quantum information, network communications, integrated circuits, critical software, big data, artificial intelligence, blockchain, and new materials. Support open-source communities and open source projects
Improve self-sufficiency in software and hardware - 5G, integrated circuits, new energy vehicles, artificial intelligence, and industrial Internet.
‘Collaborate to promote the industrialisation and large-scale application of information technology software and hardware products, accelerate integration adaptation and iterative optimisation, promote the software industry to become bigger and stronger, and improve key software and hardware technology innovation and supply capabilities.’
New business form and models - Platform companies are encouraged to “strengthen the integration and sharing of resources such as data, products, and content, and expand the coverage of online services such as collaborative office and Internet medical care.”
Government services
Smart city upgrading - standardisation of services, with ensuing services to improve accessibility and inclusiveness. Call out for child welfare, childcare, housekeeping to be digitally linked and supported. Education and medical services for the young and elderly respectively should be digitalised.
Promote the integrated development of digital urban and rural areas
Invest in smart residential areas and commercial spaces - with smart and interactive shopping, entertainment and exhibition
Digital economy governance structure
Strengthen the collaborative governance and supervision mechanism - Create and develop governance structures compatible with sustainable and healthy development. The focus isn’t on curtailing but development alongside supervision.
Clarify the responsibilities of departments and regulatory agencies and strengthen cross-level coordinated supervisions.
Clarify the scope of supervision and create unified rules.
Delegate power in regulating services.
Optimise the business environment to streamline administration for platform economies so that innovations are not hindered.
Establish and strengthen the credit-based economy.
Promote the sharing and utilisation of regulatory data.
Increased supervision - Regulate the market with a focus on encouraging innovation and protecting consumers’ rights and interests. Establish and improve analysis-based decisions in big data, AI, and blockchain systems. Identify, judge and mitigate potential systemic risk
Encourage fair competition and pluralistic supervision - Encourage healthy competition and maintain a fair and efficient market. Accelerate market access system and fair competition review mechanisms and prevent administrative power to exclude and restrict competition. Strength anti-monopoly law enforcement.
"Further clarify platform enterprises" main responsibilities and obligations, promote the establishment of industry service standards and industry self-discipline, and protect the legitimate rights and interests of platform employees and consumers.’
Also, establish clear online dispute resolution mechanisms and channels.
Digital economy security
Enhance network security protection capabilities - especially in physical domains such as telecommunication, finance, energy, transportation and water conservancy. Putting in place network security infrastructure.
Upgrade and standardise existing data security infrastructure - Establish data classification and grading protection system, "study and promote the construction of a data security standard system, standardise the whole life cycle management of data collection, transmission, storage, processing, sharing, and destruction, and promote data users to fulfil their data security protection responsibilities." Improve the relevant systems and norms for the safety management of cross-border data flow
Prevent all types of risks - This includes risks arising from technical, economic, and excess capital risks. Increase inclusivity for vulnerable populations.
International cooperation in the digital economy
Improve international digital trade linkages - Improve digital trade promotion policies, strengthen institutional supply and legal protection. "Increase the opening up of the service industry, explore and relax the access to new forms of the digital economy, introduce global service industry multinational companies to set up operation headquarters, R&D and design centres, procurement logistics centres, and settlement centres in China, actively introduce high-quality foreign-funded enterprises and entrepreneurial teams, and strengthen innovative international resources are 'brought in.'" Promote cross border e-commerce, with setting up pilot areas, industry supply chain and ecosystem for cross-border e-commerce
Promote the development of ‘Digital silk road’ - promote China - ASEAN and China - CEEC digital economy cooperation through overseas infrastructure. Coordinate and carry out overseas digital infrastructure cooperation, and carry out cross-border optical cable construction cooperation with countries jointly building the "Belt and Road" per local needs and conditions to ensure the interconnection of network infrastructure. Build a blockchain-based trusted service network and application support platform to provide a fundamental guarantee for extensive digital economic cooperation.
Build a good environment for international cooperation - Actively learn from international rules and experience. Explore and establish governance rules around significant issues such as cross-border data flow, market access, anti-monopoly, digital renminbi, and data privacy protection.
Safeguards
Organisational capacity and coordination improvements - inter-ministerial coordination mechanism for developing the digital economy, strengthening situation research and judgment, coordinating and solving the major problems.
Increase financial support - Encourage and guide social capital to set up market-oriented digital economy subdivision funds, support eligible digital economy enterprises to enter the multi-level capital market for financing, encourage banking financial institutions to innovate products and services, and increase support for the core industries of the digital economy.
Improve digital literacy of the population
Implement pilot demonstrations of small scale experiments
Strengthen monitoring and evaluations
Hopefully that made sense - let me know if not! Talk soon.