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Five things about China’s New Five-Year Plan

  • China’s 14th Five Year-Plan for 2021 to 2025 provides the country’s roadmap for sustainable and quality growth
  • expect further economic and policy announcements over the coming months, which could offer positive catalyst for markets
  • remain overweight Chinese equities and bonds within our global asset allocation strategy
  1. Quality, not Quantity: Unlike previous versions, the new five-year plan does not set a specific numerical target for GDP or income growth. Instead, the focus is on qualitative targets like increasing the size of the middle class and GDP per capita reaching levels of the middle class in developed countries. In other words, quality matters.
  2. Domestic Demand: The key objective is about expanding the middle class to stimulate domestic demand, which we think will come in the form of corporate tax cuts and lower barriers to entry. Other initiatives will focus on narrowing inequality between cities and rural regions by reforming the urban household registration system (Hukou) and other rural reforms.
  3. Opening China to the World: This is about further opening China’s markets to foreign players through trade and investments. We expect tariff cuts and more foreign investment. We also expect financial market liberalisation to continue through the stock and bond connect programmes, capital market reforms and further inclusion into international benchmark indices.
  4. Technology & Innovation : In particular, modernising supply chains and localising technology. We expect China to spend more on research & development - we forecast an increase to 3% of GDP, compared to 2.2% in 2019 - to become more technologically self-reliant. We would expect financial reforms so China’s capital markets can better fund R&D spending. Other initiatives such as tax incentives, public-private partnerships and better intellectual rights protection could take focus.
  5. Green Development: China has committed to continue to promote green development. Having met most of its green targets from the previous five-year plan in 2019, we are expecting Beijing to set more targets for the reduction of greenhouse gas emissions and the wider use of non-fossil fuels. This would make sure it remains on track to achieve its Paris climate agreement pledges by 2030 and to achieve carbon neutrality before 2060.

Investment Strategy Implications

  1. Upcoming details from five-year plan could be market catalysts. More details relating to the five-year plan will be announced over the coming weeks and months, which could drive relevant industry sectors to perform.
  2. Remain overweight on Chinese equities and Chinese hard currency and local currency bonds. Within a diversified portfolio, we are overweight Chinese and Asia ex-Japan investments due to favourable growth characteristics and recovery from the Covid-19 pandemic.

Risks to our view

While we are positive on the economic prospects of China and Asia in general, the Covid-19 pandemic has created a great deal of uncertainty around the world, particularly in the Western world.

Bearing in mind a large part of China’s demand still comes from overseas, economic activity could end up disappointing, particularly if there are further severe outbreaks of Covid-19 or a continuity of global trade tensions. These factors may have a detrimental impact on Chinese investments.

Possible Winners

  1. Local Technology companies: local leaders in innovative sectors such as biotechnology, semiconductor, robotics, automation, smart manufacturing and digital supply chain stand to benefit.
  2. Education sector: the Chinese education sector could also benefit from the potential for more R&D spending and further emphasis around talent development.
  3. Foreign and domestic financial institutions : further liberalisation of the Chinese financial sector is expected to create new opportunities for both local and foreign financial institutions. We think companies with exposure to Shenzhen and the Greater Bay Area overall will benefit in particular.
  4. Green technologies: a reinforced emphasis on green development should benefit companies that offer technologies around - for example, in renewable energy and electric vehicles.

China’s economic rebound

Year-on-year percentage change in real GDP

China's GDP grew by 4.9% in the third quarter of 2020.

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