Five-Year Plan: Why a market-oriented China still needs such a plan

In the early 1990s, as free-market optimism swept much of the West and the Soviet bloc collapsed, the World Bank examined eight high-performing Asian economies in the period from 1965 to 1990 in a report. One of its observations was subtle yet striking: “state versus market” logic explained far less than many had assumed.

A message in the World Bank’s 1993 Policy Research Report The East Asian Miracle: Economic Growth and Public Policy was that while most of East Asia’s rapid growth rested largely on market-friendly fundamentals, ranging from macroeconomic stability to rapidly growing human capital, carefully designed government roles also mattered in a few economies, mainly in Northeast Asia.

This message is worth revisiting in 2026, as Beijing is expected to formally adopt the 15th Five-Year Plan (2026-2030). Details are expected to be finalized through the upcoming annual “two sessions” this month.

Beijing views its plans as a framework that ensures policy continuity in the face of geopolitical tensions and economic instability. In Xi Jinping’s words, it will take “three consecutive five-year plans” to basically realize what he calls Chinese modernization by 2035 (到2035年，用3个五年规划期，基本实现社会主义现代化). Xi’s vision, in some respects, echoes the early nation-building drive under Mao Zedong in the 1950s, when the First Five-Year Plan inaugurated an ambitious campaign of rapid industrialization and a long-term effort to close the gap with advanced economies such as the United States, a task Mao suggested could take roughly 15 five-year plans.

BEYOND BINARY CHOICE

Neo-liberals claim that economic planning is a key characteristic of centralized economies and runs counter to the market. So why is the world’s second largest economy, having already pledged to let the market “play a decisive” role, still adopting such a national plan?

China arguably has one of the world’s most institutionalized national planning systems among large market economies. These plans are no longer about dictating what individual enterprises produce or how they price their goods, as they were supposed to be under command economy. Instead, they define broad development priorities, coordinate policies across ministries and regions, and set medium-term reform goals. The market determines operational outcomes, while the plan, as a guide for Chinese regulators, shapes the policy environment.

Seen from this angle, the issue is less a “planning versus markets” binary choice, but rather about the allocation of tasks in national governance: which problems can be left to prices and private decision-making, and which require some form of government action, and how to prevent the latter from expanding too far.

In official Chinese documents, the commitment to “enabling the market to play a decisive role” （使市场在资源配置中起决定性作用）in resource allocation is consistently paired with an emphasis on “enabling the government to better play its role.” （更好发挥政府作用) China is also mulling a national development planning law to serve as a basic law for regulating the formulation of national development plans and ensuring their implementation.

UNDERLYING LOGIC

Critics of economic planning argue that government intervention undermines efficiency. In practice, however, efficiency depends less on choosing one governance model over another. What truly matters is fixing problems. China’s achievement in the wind power sector offers a concrete example of how national coordination works.

In this particular sector, private returns and public goods are closely intertwined. Wind farms need to profit, but they also serve climate and energy-security goals in a way that markets may fail to achieve at the necessary scale and speed. Here, a larger role for collective governance, namely planning, standards and targeted support, can help align private investment with broader objectives.

This case is especially relevant for China, the world’s top carbon dioxide emitter, which is striving to reach peak carbon emissions before 2030 and achieve carbon neutrality before 2060.

Markets should not be treated as infallible. Laissez-faire could generate crises, recessions or inefficiencies. Recognizing this, governments in major market economies are increasingly embracing industrial policies.

The United States does not label its industrial policies a “five-year plan,” but legislation such as the CHIPS and Science Act, large-scale clean-energy incentives and repeated crisis-era rescues, amount to a more assertive government role, one that seeks not merely to regulate markets, but to steer them toward strategic outcomes. The European Union’s Green Deal, its debate over “strategic autonomy” and its growing use of state aid, all point in a similar direction.

Here, the underlying logic is shared: markets alone do not guarantee technological edges, industrial resilience or rapid decarbonization. In practice, markets are excellent at optimizing for the short term and for private returns, but not necessarily for long-term social goals.

Framed this way, the argument for a five-year plan is not that officials are better at picking winners than entrepreneurs. It is that there are some tasks markets will not undertake at the right scale or speed, unless someone sets the direction and builds the scaffolding.

Poorly designed industrial policy can be as damaging as the absence of policy. The Northeast Asian evidence as noted in the World Bank report suggests that, under certain conditions, including disciplined macroeconomic management and openness to competition, a mixed approach can perform reasonably well. As prominent Chinese economist Justin Yifu Lin famously said, a mixed system requires an “effective market” and a “facilitating government” (有效市场，有为政府).

The idea that foresight guards against future risk has long been embedded in China’s political and cultural tradition. Confucius said: “If a man takes no thought about what is distant, he will find sorrow near at hand.” （人无远虑，必有近忧）It is, therefore, not surprising that the concept of the five-year plan, though introduced from the Soviet Union, was readily embraced by China as a structured expression of this enduring preference for long-term thinking.

For international investors and multinational companies, China’s new five-year plan is more than a domestic policy document. It is China’s institutional response to the same structural pressures that are prompting renewed industrial strategy in places like Washington and Brussels. Enditem