Moving Beyond the Government-Market Dichotomy

The reason the system of five-year plans is well suited to China lies in the fact that it is rooted in the country’s national conditions. China has a vast territory, a large population and pronounced regional development imbalances. The system allows for overall coordination at the national level, setting unified development goals and strategic directions, aligning the pace of development across regions and sectors, and avoiding fragmented governance and blind expansion. In doing so, it enables the optimal allocation and efficient use of resources.

At the same time, China is in, and will long remain in, the primary stage of socialism, where development tasks are both demanding and phased in nature. The five-year plan system, structured in five-year cycles, translates long-term objectives into stage-based tasks. It addresses pressing economic and social issues in the present while also laying a foundation for future development, ensuring that national strategies are both practical and continuous.

Many countries recognize the importance of medium- and long-term strategy for national development. Western market economies such as the United States have advanced renewable energy through long-term blueprints aimed at reducing dependence on traditional energy sources. Germany has also introduced its Energy Transition 2050 plan to achieve a low-carbon energy system.

The key differences, however, are more striking. Western long-term strategies rely more heavily on market mechanisms, with governments mainly influencing market players through policies and subsidies. By contrast, China’s five-year plans embody an integration of a well-functioning government and an efficient market. The state plays a more direct role, not only in setting strategic goals but also in shaping industrial structure and building infrastructure. At the same time, it works to improve market conditions and institutional foundations, creating an environment in which market forces can function more effectively.

Not a ‘planned economy 2.0’

As China has transitioned from a planned economy to a socialist market economy, the role of five-year plans has undergone a profound transformation. At the institutional level, it has shifted from “planning” to “strategic guidance,” with far less emphasis on mandatory directives. It has become a key link between the government and the market, helping anchor expectations for businesses and investors.

Its scope has also expanded. No longer confined to industrial output, the plans now encompass a wide range of areas, including social development, science and technology, environmental protection and public wellbeing. The inclusion of technological innovation and green development in the 14th Five-Year Plan (2020-25) reflects this evolution.

The formulation process has also moved away from closed-door decision-making toward broader participation. Through major research projects, expert consultations and public input, the plans draw on a wide range of perspectives and become more targeted.

In terms of implementation, the government uses coordinated policies to guide the market while ensuring the market’s decisive role in resource allocation.

Legal frameworks have also been strengthened, with the National Development Planning Law clarifying the plans’ overarching role and establishing a management mechanism covering the entire life cycle of planning. The law was adopted at the annual session of the National People’s Congress, China’s top legislature, in March.

Government vs. market: an either-or choice?

As a core institutional pillar in China’s governance framework, the essence of the system of five-year plans lies in balancing “national strategy” with the “decisive role of the market in resource allocation.” Through the plans, national strategy provides long-term guidance and institutional safeguards for market players, while market mechanisms, such as pricing, supply and demand, and competition, drive innovation and fuel development momentum. The two are not in opposition but are complementary. This integration reflects both the advantages of the socialist system and the strengths of a market economy.

In the language of mainstream Western economics, China’s five-year plans can be understood as a combination of adaptive macro-planning and incentive-based target governance. They retain macro-level strategic planning while allowing for timely adjustments to changing conditions. Combining top-down guidance with bottom-up flexibility and innovation, the plans use both binding and anticipatory indicators to incentivize and regulate market behavior.

As China enters the period of the 15th Five-Year Plan (2026-30), the relationship between an efficient market and a well-functioning government will take on new characteristics. On the one hand, the market’s decisive role in resource allocation will become more prominent. The government will further reduce direct intervention in microeconomic activities and instead stimulate vitality and creativity among market players by improving rules and optimizing the business environment.

On the other hand, the role of a well-functioning government will become more precise and efficient. It will focus on implementing well-conceived and targeted macroeconomic regulation and channeling resources toward key priority fields and weak areas of the economy through major strategies, plans and policies.

Planning vs. entrepreneurship

Entrepreneurship values risk-taking, trial and error, and disruptive innovation, while planning emphasizes expectation management and stability. They may appear contradictory, but in reality they are also complementary.

Medium- and long-term national planning provides entrepreneurs with predictability and confidence. In the face of market fluctuations, entrepreneurs often must choose between short-term gains and long-term development. Clear policy direction and stable expectations allow them to plan with more confidence and invest more boldly, without being overly constrained by short-term volatility.

Planning also serves as a “navigation system” for business operations. Through macro-level guidance, it clarifies development directions and helps avoid blind exploration. Planning in strategic emerging industries guides enterprises to focus resources on key areas, improving the efficiency of innovation. Policies such as tax incentives and fiscal support stimulate and sustain innovation. Planning also promotes collaboration between industries, universities, and research institutes, facilitating the concentration of essential factors and providing strong momentum for enterprise innovation.

New growth drivers

At the beginning of the 15th Five-Year Plan period, the most important new growth drivers for China’s economy lie in technology-driven new quality productive forces and the upgrading of service consumption. They not only represent a break from traditional growth models but also provide a new paradigm for handling the relationship between the government and the market.

In terms of new quality productive forces, breakthroughs in cutting-edge fields such as AI, quantum technology, and biomanufacturing are giving rise to industrial clusters worth 1 trillion yuan ($146 billion) in areas like intelligent manufacturing and green energy. Unlike traditional growth drivers that rely on resource inputs, new quality productive forces emphasize coordinated innovation across technology, application scenarios and ecosystems. The government no longer directly intervenes in technological pathways but instead reduces the cost of trial and error by building innovation ecosystems and improving institutional frameworks such as data rights.

China’s service retail sales grew 5.5 percent year-on-year in the first quarter of 2026, with new forms of consumption such as cultural tourism and digital services becoming key growth engines. The personalized and experience-driven nature of service consumption requires service providers to respond more precisely to changes in demand. The clear division—market-driven demand and a government-optimized environment—helps prevent the erosion of market vitality that can stem from excessive administrative intervention.

Compared with traditional growth drivers, the government’s role in cultivating new drivers is shifting from that of a “leader” to a “collaborator.” In innovation, it stimulates enterprise initiative through improved mechanisms; in consumption, it ensures fair competition through a law-based business environment.

The market, in turn, guides resources toward more efficient sectors through price signals. This combination of an efficient market and a well-functioning government avoids both the chaos of laissez-faire and the stagnation of overregulation, providing institutional support for high-quality economic development.

The author is a professor at the School of Economics and director of the National Center for Economic Research, Peking University.