China’s Low-Key Growth Plan May Pack A Punch Hayden Briscoe, AllianceBernstein
For most investors, China’s formal announcement of its 2016 economic and fiscal targets was a non-event, because officials had already released many key points publicly. In our view, however, the plan could be a game-changer.
The official unveiling came during the latest National People’s Congress (NPC). Held in Beijing in March, the NPC is widely seen as having symbolic, rather than real, value. Its agenda consists largely of ratifying decisions made by the National Congress of the Communist Party of China, held the previous November.
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This year’s GDP growth target announced at the NPC by Premier Li Keqiang–a flexible range of 6.5% to 7.0%–was widely expected and caused little surprise.
The same was true of statements regarding expansionary fiscal policy and accommodative monetary policy, supply-side adjustments (such as tax cuts), reduction of overcapacity in established industries, and continuing structural reforms and economic rebalancing.
We think it would be unwise to treat the NPC or these pronouncements lightly–history suggests they can pack a stronger punch than many people expect.
Don’t Underestimate Xi–or His Plan
At the November 2012 party congress, for example, attention focused on the appointment of Xi Jinping as General Secretary of the Communist Party, a prelude to his becoming president the following year. The congress also announced a crackdown on corruption and a slowdown in infrastructure spending. True to form, these were ratified by the NPC the following March.
Few observers realized at the time how huge an impact these measures, announced as part of the 12th Five-Year Plan, would have on China or, indeed, the world.
As the measures took effect, the slide in commodity prices accelerated, hurting commodity-linked economies and currencies the most. The selloff cruelly exposed the structural weaknesses in the political and economic systems of a number of Latin American commodity-exporting countries. Even more dauntingly, global trade volume collapsed.
President Xi inherited the 12th Five-Year plan but the latest one, the 13th, is his. Given the focus and determination with which he has carried out the inherited plan, we think it’s vital that investors understand the policy implications and potential economic impact of Xi’s own road map.
Risks and Challenges of the New Growth Package
The new plan, directed at the economy’s supply side, focuses on cuts in taxes and other imposts to help businesses compete. It also sets aside money to cover the cost of redundancies in industries–such as heavy manufacturing in the country’s north east–that are suffering from overcapacity.
In other words, China is taking the extremely risky step of starting major supply reform at a time when local and global economies are weak.
The government expects to support this structural change with public spending, and by transferring non-performing bank loans on to its own balance sheet. It will do all this while supporting growth and moving the entire economy up the value-added chain.
This is challenging, to say the least–for China and, potentially, other emerging markets and the developed world. We think investors should take note and review their research strategies to ensure they are appropriate for what we see as the next chapter in the China story
Research Settings Need to Be Granular, Not General
From an investment research perspective, we think the focus should now be on monitoring closely the trajectory of China’s economy. This trajectory is likely to remain volatile, in our view. Investors should also understand its linkages to emerging and developed economies.
The effects will not be evenly distributed. The linkages between most Asian emerging economies and China are based on geographic proximity and broad trading relationships. But links between Latin American countries and China exist mainly through commodity prices. Linkages between China’s economy and the emerging economies of Europe, the Middle East and Africa are more mixed.
Investors will need to think carefully in terms of specifics–not generalities.
For example, they should identify how these linkages will lead to pockets of value, whether to invest regionally or globally, whether to favor equity or debt, what the effect will be on currencies, and where China sits at any given moment in its policy and economic cycles. The focus should also include the potential of these risks and opportunities to affect developed markets.
On balance, we remain positive on China in the medium-to-long-term based on the likely benefits of its reform program. We’re cautious in the short term, given the risks of transition in current market conditions.
Clearly, rigorous on-the-ground research in China as part of a regionally and globally integrated investment research effort is now more important than ever.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.
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