An Update from BlackRock’s Helen Zhu Head of China Equities.
China’s top 200 Communist Party officials gathered in Beijing in the last week of October to formulate the country’s 13th Five Year Plan. The messages delivered in the post-event communique look to be largely in line with our and market expectations. The focus continues to be on pushing forth necessary actions to achieve structural improvements and a more sustainable growth path.
GDP growth: it’s not about the target figure anymore, it’s about stability as a foundation for reform.
Premier Li Keqiang indicated an annual average growth rate of 6.53% is required to build a “moderately prosperous society” through doubling per capita income by 2020 from 2010 levels. Amidst the evidenced slowdown in growth, we also anticipate that the target growth rate, if set, will be around 6.5 to 7% for 2016.
However, investors should keep in mind that China’s GDP growth rate remains one of the strongest globally even under this “new normal” growth trajectory. In our opinion, the numeric target growth number should no longer be stealing the spot light. What matters most is what measures to ensure economic stability are adopted, which provides a reasonable foundation upon which to push forward further structural reforms.
Tackling demographic challenge: one more baby and improvement in social safety nets.
Finding solutions to the China’s longer-term demographic challenges was also on the agenda. After 35 years, the one-child policy has been abandoned and all Chinese families will be allowed two children. At the other end of the age spectrum, the government plans to further reform the pension system and expand insurance coverage at national level. Demographic shift is a very lengthy process and the headwind of low labor force growth would not be fully relieved in the next few decades.
Both of these moves have clear longer-term benefits with no real downside risk to growth. It’s our view that addressing the problems sooner rather than later may have near term cyclical implications. The relaxation of one-child policy and successful enhancement in safety nets could help boost near to medium term demand growth through more child related and senior consumption, respectively.
Blending in the innovation ingredient: focus on development of strategic industries to unlock growth potential.
The “Internet+” strategy is emphasized in the communique, along with encouragement of development of sharing economy, big data, clean energy, biotechnology, and service sectors. Compared with developed markets, these innovation-led industries still have ample room to expand in China. We believe the government has recognized the significance in using innovation to make Chinese products more competitive and unlock future growth potential. The productivity gain could also go some way to help counter the demographic headwinds.
We may see more release in supportive policies driving increased integration of internet, cloud computing, information technology and traditional manufacturing techniques. Internet and high tech companies may benefit from higher demand and more preferential policies like tax support while sectors like telecom may continue to ‘subsidize’ such growth by supporting domestic technology and cutting tariffs to improve broadband affordability.
Marching on with reform agenda: “The key to China’s development lies in reform” – President Xi Jinping noted in his speech in Seattle in September.
President Xi indicated that China’s “reform is aimed at modernizing the country’s governance system, and governance capabilities so that the market can play a decisive role in the allocation of resources.” Price deregulation is an essential reform. We believe the immediate focus should be on pro-growth moves like liberalizing energy prices (so that commodity price declines can be passed through to the downstream) while ones that have more questionable cyclical implications may need to tackled more gradually. We would not be surprised to see further breakthroughs in various areas of financial, fiscal and social reforms, including hukou (residency) reform – another boost to productivity.
Before the Fifth Plenum Session President Xi has compared China’s economy to a giant ocean-going ship on the sea; “Any ship, however large, may occasionally get unstable sailing on the high sea.” The crucial questions are “whether [the ship] is sailing in the right direction, does it have sufficient engine power and energy to stay long.” The 13th Five Year Plan aims to steer China onto a sustainable growth path, and we expect to see more details unfolded in the coming weeks and months. While occasional stormy weather and choppy water are unavoidable and will recur from time to time, we believe that Captain Xi is steering the China ship towards a brighter, more prosperous port by 2020 with this route plan.
