03 December 2015

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 focus, according to the post-event communique , continues to be on pushing forth necessary actions to achieve structural improvements and a more sustainable growth path.

Tackling demographic challenge: one more baby and improvement in social safety nets

Finding solutions to 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 to have two children. At the other end of the age spectrum, the government plans to enhance its “safety nets” by undertaking further reform of the pension system and expanding insurance coverage at the national level.

Both of these moves have clear long-term benefits with no real downside risk to growth. It’s our view that addressing these problems sooner rather than later may have near-term cyclical implications. The relaxation of the 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 emphasised in the communique, along with encouragement to develop 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 recognised 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 impediments.

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, such as tax support, while certain sectors, including telecoms, may continue to ‘subsidise’ 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 noted in his speech in Seattle in September

President Xi indicated that China’s “reform is aimed at modernising 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 liberalising 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 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 periods of stormy weather and choppy water are unavoidable, we believe that Captain Xi is steering the China ship towards a brighter, more prosperous port by 2020 with this route plan.

1Communique of the Fourth Plenary Session of the 18th Central Committee of the Communist Party of China, October 23, 2014

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This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are as of 01 November 2015 and may change as subsequent conditions vary.

The relaxation of the 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.