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10-2015

The CPC’s 18th Central Committee has been gathering in Beijing for the fifth plenary session from Monday to Thursday. Topping the agenda was the 13th Five-Year-Plan, which maps the government’s main economic and development initiatives for the period from 2016 to 2020.

Market Perspective

The 5th Plenum and the 13th Five-Year plan

All we have at this point is a very high level announcement. The high level statements then get fleshed out at the local level over time, with each province coming up with its own way of getting to the high level targets.

In general the thrust of the 13th 5-year plan is to continue the reform programme outlined at the 3rd plenum, which was designed to rebalance the economy away from the old investment- and export-driven model to a more sustainable model based on domestic consumption. The headlines focus on sustainable growth, elimination of poverty, innovation, opening the economy, changes to the one child policy, increasing the social safety net, and continuing to clean up the party through anti-corruption. This is all sensible and broadly in line with market expectations.

Growth The statement says that the economy will target “medium to high growth” in the next five years. This is interpreted as meaning that they are sticking to their goal of doubling the size of the economy between 2010 and 2020. To do this they need 6.5% growth on average over the next 5 years.

From our perspective, this is preferable to sticking to a hard 7% growth target, which was a possibility. We prefer a lower but realistic target rather than a high target. That’s because the quality of GDP growth (what GDP is comprised of) is more important than the quantity of GDP growth (the headline number). Reforms which will continue the process of rebalancing the economy away from investment and towards consumption are to be welcomed. But the higher the growth target, the worse it is for rebalancing the economy, because China will have to rely on debt-financed fixed asset investment to fill the gap and hit the target.

Matthew Sutherland Head of Product Management - Asia at Fidelity Worldwide Investment.

The rebalancing of industry from Old to New China

Source: Credit Suisse, 16 September 2015

-30%

-20%

-10%

0%

10%

20%

30%

40% Revenue growth

“Old China” sectorsy/y%

Insurance

Health Care

Information Technology

Media

Household & Personal Products

Commercial & Professional Serv

Capital Goods

Ex-div financials

Telecommunication Services

Utilities

Materials

Energy

BanksFood & Staples Retailing

Transportation

Consumer Services

Consumer Durables & Apparel

Automobiles & Components

Retailing

Food Beverage & Tobacco

Real Estate

At a glanceSustainable growth

“Medium to high growth” targeted in the next five years with around 6.5% p.a.

Concentrating on the quality of growth rather than the headline numbers

InnovationNurturing innovation and allocating resources more efficiently

Opening the economyMaking it easier for foreign businesses to operate in China

Continued efforts of “One Belt One Road”

Changes to the one child policyCouples will be allowed to have two children to address the shrinking working age population

Continued anti-corruption measuresEnsuring officials “don’t want to be corrupt, don’t dare to be corrupt, and couldn’t be corrupt even if they did”

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10-2015

More specifically under the topic of growth, the statement indicates that China seeks greater sophistication in industry and needs to significantly raise the contribution of consumption to economic growth. This will involve accelerating the pace of urbanization, and there is likely to be a hard target for this when more details emerge. The communiqué also refers to modernising agriculture and the elimination of rural poverty by 2020.

The statement acknowledges the only route to maintaining stable growth is reform.

Innovation China needs to become more innovative, especially in political theories, science, technology and culture. The government plans to nurture innovation and allocate resources more efficiently. Specified areas to this end include entrepreneurship and the internet, the sharing economy and big data. Innovation also links back to the growth targets of becoming a global manufacturing power and modernizing agriculture.

Opening up China wants to continue to open up to the world and participate more in global governance and trade. It intends to clarify rules to make it easier for foreign companies to do business in China. It will adopt a “negative list” which seeks to minimize the industries off limits to foreign investment. This signals commitment to the ongoing steps to open up the capital account and internationalise the renminbi, consistent with China’s aims of renminbi inclusion in the IMF SDR basket.

“One Belt One Road” is mentioned in this category of opening up, although it is now referred to as the “Belt and Road Initiative” – will BRI become the new acronym?

Importantly for us in Hong Kong, both Hong Kong and Macau are mentioned as seeing their role enhanced in promoting the nation’s economic development and opening up. Economic cooperation with Taiwan will also be promoted.

One Child The policy attracting the most headlines is the relaxation of the one child policy. China will now allow all couples to have two children in an attempt to deal with the demographic headwind of a shrinking working age population and increasing dependency ratio.

The one child policy was introduced in the 1970s to rein in the surging population. It was relaxed a couple of times, with the most recent version stating it is acceptable to have two children if one of the parents is an only child.

This is widely seen as positive for the economy, although it should be pointed out that children are also dependents until they are old enough to enter the workforce, so a rising birth rate actually increases the dependency ratio for the first 20 years or so. So any benefits are at least 20 years out.

Also in this category is reference to a stronger social safety net, a key way of stimulating consumption by making citizens feel more confident that the state has their back, “an elevated sense of being well off”, as the statement puts it. This will be done by “more effective institutional arrangements such as the extension of old-age insurance to the whole population and critical illness insurance in full.

Education is stated as important, making high school education free for poor students and provision of subsidies. Environmental protection is also mentioned here with Xi Jinping firmly behind the drive to clean up China’s air and water.

Anti-corruption The meeting endorsed prior decisions to revoke the party membership of corrupt former officials and noted that continued efforts must be made to fight corruption so that officials “don’t want to be corrupt, don’t dare to be corrupt, and couldn’t be corrupt even if they did”. New disciplinary regulations list playing golf and gluttony as violations for the first time.

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