A Step In China’s Economic Journey by Robert Horrocks, PhD, Matthews Asia
We emerge from the recent Chinese Communist Party Plenum with sketches of a new “five-year-plan.” Hurrah! There is always much fanfare around these events—not least in the investment community. We will no doubt hear the sentiment that China is a policy-driven stock market and so all the short-term traders are keen to see which sectors and industries are in favor. Then begins the game of who might get a subsidy, a contract or beneficial regulation.
Fair enough, if that is your game.
But I would argue that much of what has come out of the plenum is hardly a surprise. And you don’t need to think of China in terms of a policy-driven market. What guides the policymakers, after all, are the hopes and aspirations of over 1 billion people. That happens to be what drives corporate profits, too. So, China is a market that is driven by the population at large and you are likely to give your chances of investment success a boost by focusing on what matters to them.
There were a couple of big non-surprises during the recent Plenum—growth remains a priority. Well, that is hardly new news. But it is good to be reminded that China is still growing—6.5% annual growth will probably be the target. This might seem a tragedy to those who became accustomed to 10% annual growth. But given that academic economists in the U.S. and Europe are publicly discussing “secular stagnation” these days, 6.5% seems pretty good.
The end of the single-child policy is not exactly a well-kept secret. The Communist Party had been hinting at this and loosening such regulations for some time, in response to an aging and, ultimately, shrinking workforce. What effect will it have? Well, the birth rate might increase. But China is also getting to the point where it is fairly wealthy and birth rates are going to be presumably pretty low, and comparable to the rest of North Asia. The workforce can be “made younger” and increased by immigration or by overseas investment, both of which are already taking place.
But we anticipated a couple of the initiatives in some of our recent commentaries on the region. In October, I wrote about “Asia’s Political Divide” and our October issue of Asia Insight discussed the “Asia Lens on Global ESG.” We see an increased focus on the welfare state, on the one hand, and environmental protection on the other. On welfare, the five-year plan intends to lift 70 million people out of poverty by 2020, through an improved social safety net: expanded pension coverage and accident and illness insurance protection. In addition, the rhetoric of environmental protection should see changes in taxation, more investment into non-fossil fuel energy, and more time and money spent cleaning up China’s air and water. Funding for such programs tied to social welfare was also highlighted with the decision to transfer more State assets currently, held at the government level, to its existing social security fund. China has also agreed to reduce emissions per unit of GDP by 40% to 45% by 2020, compared to 2005 levels and also to increase the share of non-fossil fuel energy to 15% within the same time frame. China has also committed to peak its carbon dioxide emissions by approximately 2030 and strive to hopefully reach that even earlier.
China’s push for further economic integration and its efforts to address income equality continues in its new communiqué, with specific reference to access to nationwide education and vocational training. An initiative first proposed in 2013, known as “One Belt; One Road” will support this national push for equality, and attempt to address the geographical inequalities between central and western provinces from their counterparts along the eastern seaboard. In addition to the communiqué, China has also released a document highlighting reforms in its rural areas, specifically looking at the ability of farmers to monetize land rights. This has long been a sticking point, and should promote further urbanization.
Why is this not a surprise? Well, China has been very successful at bringing people out of poverty and at allowing them to start enjoying middle-class lifestyles. At that point, people become less concerned about making sure they consume enough calories to survive and a lot more interested in their quality of life: dining in restaurants, wearing nice clothes, eating for fun (sugar); improving their health care, creating a better environment and ensuring social justice. It is inevitable, I assume, too, that political discourse will continue to change people’s demands to hold decision-makers accountable and to be included in debate (not that the five-year plan, an economic document, is meant to cover this.)
At Matthews Asia, we emphasize that the context for our investment research is an understanding of how the lives of the Asian household are changing—how opportunities, desires and spending patterns are changing—and whether these changes are implemented by individuals or by their representatives in government. So, the latest plan is not a surprise, merely a further step in China’s economic journey to becoming a wealthy nation.
Robert Horrocks, PhD
Chief Investment Officer