As China enters the 15th Five-Year Plan period, whether it can balance security and growth will be critical to its future economic trajectory. Meng-Chun Liu, Director of the China Economic Research Institute at the Chung-Hua Institution for Economic Research (CIER), said on October 6, 2026, that the principal constraint on China’s economic transformation is the growing importance of security-first considerations in policy and institutional arrangements. Its economy could follow one of two paths: “rebalancing toward moderate growth” or “Japanification with Soviet characteristics.” Based on the current structure of investment, consumption, and production capacity, the latter appears more likely.
Institutionalization of Security-First Policies Heightens Corporate Risk Aversion
Liu noted that in recent years, China’s security policies have shifted from rhetorical emphasis to institutionalization, with security considerations now permeating additional sectors of the economy. As the predictability of policy boundaries, property-rights protections, and policy commitments declines, companies may become increasingly risk-averse, which could undermine long-term private investment and high-risk innovation.
Liu argued that excessive emphasis on security may constrain both the efficiency and returns of economic activities. In an uncertain policy environment, companies are likely to prefer short-term, low-risk investments, thereby exacerbating structural challenges for China’s economic transformation.
Technology Innovation Excels at Scaling from 1 to 100, but Disruptive Breakthroughs Remain Constrained
Regarding technological innovation, Liu characterized China’s current innovation system as a “birdcage model.” The state defines development boundaries and concentrates resources through “new quality productive forces” and a whole-of-nation system to accelerate the growth of selected industries.
Liu stated that China has demonstrated the ability to transition from technological application to large-scale production in electric vehicles, lithium-ion batteries, solar energy, and parts of the semiconductor industry. China excels at engineering and commercializing technologies, effectively moving innovations from concept to full implementation, or from “1 to 100.” However, the environment for disruptive “0-to-1” innovation faces challenges from accountability issues and policy uncertainty, which may limit China’s potential in this crucial area because it requires long-term investment and carries high risk.
If local governments and companies generally require investment projects to yield short-term results, businesses will tend to prioritize rapid imitation, incremental improvement, and mass production. They will be less likely to invest in basic R&D and breakthrough innovations that require extended development periods.
Weak Consumption and Manufacturing-Focused Investment Drive Overcapacity into Advanced Industries
The domestic demand structure is also a key indicator of China’s economic transformation. Liu noted that household consumption accounts for about 40% of China’s GDP, consistently lower than in major economies such as the United States, Japan, and the European Union. Weak consumption, together with investment concentrated in manufacturing and selected industries, can readily result in excess production capacity.
Liu stated that China’s overcapacity has gradually expanded from traditional industries such as cement and steel to advanced manufacturing sectors, including electric vehicles and batteries. When the domestic market cannot fully absorb the additional capacity, companies inevitably seek overseas markets, which may intensify trade friction and prompt further economic and trade countermeasures.
Three Key Indicators Will Shape China’s Economic Transition under the 15th Five-Year Plan
Looking ahead to the 15th Five-Year Plan and the 21st National Congress of the Chinese Communist Party, Liu identified three key indicators for ongoing observation: whether the investment gap narrows, whether household consumption achieves structural recovery, and whether capacity utilization improves.
If structural issues related to investment, consumption, and production capacity gradually improve, China’s economy could move toward “rebalancing with moderate growth.” Conversely, if the security-first approach continues to constrain market mechanisms and suppress private investment, consumption, and innovation, the economy may shift toward “Japanification with Soviet characteristics.”
Liu emphasized that any Japan-like trajectory in China would not fully replicate Japan’s prolonged stagnation after its asset bubble burst. Japan was already a mature, advanced economy at that time, whereas China currently differs in income levels and the degree of government intervention. If China enters a prolonged period of economic adjustment, its development path may therefore diverge from Japan’s experience. Overall, current economic structures and policy directions indicate that the second scenario is relatively more likely.
Source: Economic Daily News (October 6, 2026). Two Possible Paths under China’s 15th Five-Year Plan: Meng-Chun Liu Says “Japanification with Soviet Characteristics” Is More Likely. Economic Daily News. https://money.udn.com/money/story/5603/9798059