China recently unveiled its 14th five-year plan (FYP) to guide the country’s economic development over the coming five years, along with the blueprint for a long-term strategy that outlines its vision for 2035.
Overall, we think the new long-term plan should imply a stable outlook for China, with diverse potential opportunities for investors across different sectors. China’s GDP growth should gradually moderate: with the emphasis on quality and sustainable growth, large-scale policy stimulus is no longer an option, except in extremely adverse conditions. Structural policies may be deployed instead to support growth in targeted sectors while mitigating systemic risks.
Strategically important sectors, such as technology, infrastructure, modern manufacturing and renewable energy could benefit from China’s focus on self-reliance and its “dual-circulation” strategy, while in the housing and financials sectors, risk will be carefully monitored. Service sectors such as education, research and development (R&D), and healthcare may also benefit from government support.
Four key highlights of the FYP
Growth target will likely be lower and focus on quality: The plan aims to double China’s GDP by 2035, implying an average annual growth rate of about 4.4% from 2021 to 2035. We expect the government will gradually lower the growth target over the next 15 years, starting with around 5% growth in the first five years and falling below 4% by 2031-2035 (vs. 7% in 2011-2015 and 6.5% in 2016-2020). This is consistent with China’s long-term trend growth and could help accommodate necessary reforms while avoiding the risks of over-stimulus.
Opening up should continue: Building out a self-reliant economy does not mean China will close its doors to the world. The plan pledged to implement policies such as the further two-way opening up of financial markets, strengthening trade competition, and improving international cooperation. We believe renminbi (RMB) internationalization will regain momentum, in tandem with capital market liberalization, and the government will likely show more tolerance for a stronger yuan (CNY) as the country becomes less export-reliant.
Innovation and technology will be a national strategic pillar: The goal is to achieve self-sufficiency in key technologies, such as semi-conductors and artificial technology, by 2035. China aims to boost its technology capacity, targeting key industries such as AI, quantum information, integrated circuits, and biotech. China will likely spend more on R&D and education, and use structural policies to support targeted sectors.
The environment is a key commitment: China has announced its aim to achieve “carbon neutrality” by 2060. Echoing this, the plenum called for significant progress in controlling carbon emissions by 2035. We expect China to set a higher standard for environmental protection, which means demand for related equipment, services and investment are likely to continue growing swiftly.
Investment implications: Which sectors will benefit from the FYP?
Technology was at the centre of the FYP, as China aims to be less dependent on semiconductor imports and technology. Auto manufacturers that have strong electric vehicle (EV) exposure and EV battery makers should enjoy both regulatory and demand support. The efforts to be self-sufficient in cutting-edge semiconductor technology could still take some time, however, and the sector could face near-term headwinds with more restrictions coming from the U.S. and its allies as geopolitical risk remains.
We continue to see leading internet players as key beneficiaries under the new economic framework. Online penetration was unexpectedly accelerated due to COVID-19, especially for services such as fresh grocery delivery, online education and healthcare. Significant investments made in areas such as cloud, big data, AI, and smart manufacturing will play a greater role as China’s government looks to upgrade its industrial activities into high value-added manufacturing. Domestic and overseas merchants will allocate more budget to advertising online given the better return on investment from targeted marketing.
Leading consumer names should continue to benefit from the consumption upgrade trend. Chinese consumer companies are constantly innovating to capture growing demand and they could stand to gain more market share from global brands. Services will also play a bigger part in overall consumption as penetration of products becomes higher.
China’s goal to become carbon neutral by 2060 should further accelerate the growth of renewable power generation, transmission and distribution, to be mainly implemented by state-owned enterprises. With the fast decline of solar panel and wind turbine prices, renewable energy has become more commercially viable and is on the way to "grid parity", meaning there will be no more subsidies for new onshore wind power projects after 2021.
While the government has been trying to reduce reliance on the property sector to drive economic growth by shifting focus to domestic consumption and technology, we acknowledge that most local governments are still heavily reliant on this sector, which is likely to remain a key economic driver in the medium term. The central bank’s newly imposed tests on developers will cap total debt growth, or even put pressure on highly leveraged developers to de-leverage in coming years, which should improve the sector’s overall credit profile over time. On the demand side, stable and increasingly high-quality domestic economic growth should support housing demand in the long term.
Chinese financials will likely embrace structural changes, seeking a higher share of direct financing in both debt and equity capital markets and applying disruptive technologies to core businesses, such as payments and lending. Chinese banks may gradually shift their lending focus from more traditional industries such as infrastructure and property into consumer sectors, renewable energy and technology. We also expect them to increase exposure to privately-owned enterprises in these sectors.
On commodities, we believe mining companies that have exposure to resources linked to the EV sector, such as nickel, lithium, cobalt, copper and manganese, will likely benefit from the FYP. Despite the long-term focus on renewable energy development and carbon neutrality, we expect the traditional energy sector will continue to play a key role. Given China depends heavily on imports for oil and gas, in order to improve self-sufficiency, we expect more investment in domestic exploration and development activities and technologies. At the same time, we expect Chinese oil and gas companies to be more active in international M&As and partnerships to secure long-term reserves.
Greater potential opportunities in China’s bond markets over time
We expect the onshore bond market to continue opening up to foreign investors. We also foresee a widening of the issuer base in the U.S. dollar-denominated bond market with enhanced credit transmission to improve system transparency and encourage fairer pricing of default risk. That said, we expect this transition to be gradual and smooth in order to avoid any potential market disruption.
We expect increasing opportunities in strategically important sectors, such as technology, renewable energy and consumer-related sectors. Service sectors such as education and healthcare will also benefit from government support. However, it will continue to be important to be an active investor during this period of transition and to be selective regarding investment opportunities.
Read “Assessing China’s “Structural” Monetary Policy” for further insights into China’s “dual circulation” economic strategy and monetary policy.