China recently released the details of its 12th five-year plan (2011 – 2015), outlining the government’s strategy for creating a more balanced economy and sounding the starting gun for a next phase of the country’s growth. Here, we address the major themes to emerge from the plan and what the new economic era will mean for investors....
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In a document dominated by the topic of balance, the key themes of the five-year plan were as follows:
• Rebalancing economic growth, in particular, stimulating consumption (relative to exports and investment)
• Adjusting the supply structure by upgrading traditional industries, developing new strategic industries, and promoting the service industry, clean energy and environmental protection
• Balancing regional growth by accelerating the development of inland areas, promoting regional integration, and fostering urbanisation in small- and medium-sized cities.
The emphasis on rebalancing economic growth – or the structural adjustment of the economic growth model (from investment and export-led growth to consumption-led model) – are likely to have a profound impact on China’s economy and equity markets going forward. Although this is not something new, the issue has now moved to the very core of the government’s focus.
While the 11th five-year plan also called for greater emphasis on consumption, we saw little progress on the rebalancing of the economic growth model over the past five years. This is partially due to the massive fiscal spending package and, therefore, the surge in fixed-asset investment during the financial crisis. However, given the sluggish global economic outlook for the next few years, along with current levels of over-investment/over-capacity in China, significant and renewed effort must be made to rebalance the economy if China is to sustain its future growth. The good news is that the government appears ready to address this.
China recently released the details of its 12th five-year plan (2011 – 2015), outlining the government’s strategy for creating a more balanced economy and sounding the starting gun for a next phase of the country’s growth. Here, we address the major themes to emerge from the plan and what the new economic era will mean for investors.
In an effort to achieve the rebalancing, the government has identified two key policy measures:
• raising household disposable income and reducing income disparity;
• building a better social security net.
These intentions mark a significant change for China, but they also intensify some of the concerns that already linger over the economy. Any income increase, for example, would lift labour costs and subsequently stoke the flames of inflation. The government therefore faces a significant challenge of managing inflation while working to close the income gap between urban and rural inhabitants.
If China can make some progress towards achieving this rebalance, it is the broad consumption sectors that are likely to benefit most. These include the consumer staples and discretionary sectors, insurance/wealth management services, healthcare, tourism and education, as well as the subsidised housing sector. On the other hand, the effects are likely to be less positive for the region’s low-end exporters.
With technology upgrades and the promotion of the service industry, clean energy and environmental protection also mentioned in the plan, we believe interesting investment opportunities are likely to emerge from the following areas of the market:
• alternative-energy plays (such as natural gas, wind-power and solar)
• hi-end capital goods manufacturers
• IT services
• and logistics companies.
As the government continues its urbanisation efforts – promoting faster development in inland areas – it will boost regional producers of building materials (in particular cement), retail/property focusing on the second and fourth tier cities, as will as some infrastructure companies that will also benefit from the continued investment spending by governments.
Important Information:
The views and opinions contained herein are those of Laura Luo, Fund Manager, Asian ex Japan Equities, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
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Source: ETFWorld – Schroders
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