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Investors are rooting for industrial companies, but China’s 14th five-year plan could bring a lot more stress to a post-COVID-19 global economy attempting a recovery. The world should watch carefully as Beijing gets ready to unveil a blueprint focused on high-tech industry.

Between trillions of dollars of fiscal stimulus, easy money and China’s broadly accelerating credit cycle, global industrial stocks have found a tailwind. Data out this week showed external machinery orders in Japan — a leading indicator of capital goods exports — rose almost 50% from August, the second straight increase that’s brought them back to pre-virus levels. All good news.

However, investors should exercise caution. An academic paper published in April by Xiao Cen and Wei Jiang of Columbia University’s business school and Vyacheslav Fos of Boston College found that Beijing’s industrial policies packaged together as five-year plans result in a shock to growth in targeted industries — inside and outside of China. “These plans were not preceded by low production or employment in the same industries in the U.S., but were followed by shrinkage of establishments and employment one to two years down the road,” the paper said. Based on valuations, returns, hiring decisions, no one — not even the stock market — had expected deterioration until the plans were unveiled.

In the past, this phenomenon struck things like furniture and toy companies, or so-called sunset industries. Washington could live with that. But now, China is increasingly focusing on sectors that both countries want to lead in, such as 5G and all things green. It’s a warning shot for whoever occupies the White House after the coming election.

The tension is understandable. When Beijing lays out its set of encouraged industries in a five-year plan, on average, the number of companies rises 30% relative to “nontreated” sectors. In the U.S., employment in those areas drops by 5% and firms by 7%. That said, the April study makes clear that China doesn’t subsidize industries based on trends for U.S. enterprises — they’re naturally displaced.

State planners meet later this month to review and approve the programs, which will be released at the National People’s Congress next year. The catchphrase “dual circulation” is expected to figure prominently. This strategy will primarily push domestic demand to drive economic growth, and be complemented by foreign investment and technology. So, what happens if China turns inward and moves up the technological food chain? Plenty of academic literature exists around the impact of China’s rise on working-class Americans via trade. The new study “directly connects” China and U.S. data at the business establishment level, the authors say, and shows the impact of government support. Industries that employed skilled labor (versus unskilled) saw a bigger drop.That’s a warning for businesses globally. These are exactly the kinds of companies where investors are positioning themselves: high-tech machinery and automation. Another study found that Chinese competition in intellectual property “has a strong and robust negative impact” on long-run sales growth, realized patents and spending on research and development by U.S. firms, with a magnitude far greater for sectors prioritized by Beijing.

China has churned out five-year plans since the 1950s, borrowing from the former Soviet Union. Accompanying subsidies have given direction to the economy, businesses, officials and investors. Over the decades, the plans have helped develop agriculture and industry. Technology didn’t figure prominently. In the 12th plan, which ran from 2011 through 2015, the economic growth mix changed as the break-neck pace slowed from the years after accession to the World Trade Organization. The current one mentions “innovation” more than 200 times and pushes Made in China 2025, a policy that became a sticking point in the trade spat with the U.S. Programs and projects range from high-end manufacturing, big data and smart grids to cyberspace security. These are all sectors that are top of mind for global leaders and are faced with increasing protectionism.

China’s challenges to executing industrial policy are mounting as cash becomes tighter, international political headwinds rise and the global economy struggles under the coronavirus. Largesse is forced to become more targeted, with fiscal coffers under pressure and rising debt weighing more heavily. Recovery from COVID-19 has been bumpy, and unfavorable views toward China are at historic highs.

With such constraints in mind, planners are still showing ambition. They’ve honed in on new infrastructure, such as 5G networks and green technology. Building out the internet remains a top goal. Reforming state-owned enterprises is a priority, once again, with companies like Gree Electric Appliances Inc. of Zhuhai and Hisense Home Appliances Group Co. working through mixed ownership plans and pushing for higher shareholder returns, in theory. Meanwhile, the United Front Work Department, which reports directly to central party officials, is now focused on bringing private enterprises into the government fold.

China’s plans have often ended up creating oversupply in industries, leading to global overcapacity and severe pricing declines. But the country has learned. Flooding out competitors with volumes is undesirable. The coming plan won’t be like previous ones: Beijing knows it needs to push its way up and out of a grim economic reality. That should be a worry for competitors aiming at the same space.

Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.

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