In a nutshell
At the 5th Plenum (concluded on 29th October), the ‘dual circulation” strategic shift was reiterated, so domestic demand growth, import substitution and technological self-sufficiency will be key macro factors driving investment decision and opportunities in China in the coming years. Green economy and climate change management via control of carbon emission was highlighted. More Chinese green bond issuance can be expected and investment themes should focus on environmental protection and new infrastructure spending on technological innovation/upgrading, AI, 5G networks, big data centres, healthcare, water conservation projects and renewable energy etc.
China’s 5th Plenum has outlined its development vision through 2035 for the 14th Five-Year Plan (2021-25, FYP). Details of the new FYP will be released in the next National People’s Congress (NCP), usually held in March of the year. The 5th Plenum’s policy vision has crucial strategic investment implications:
The Plenum communique did not mention any growth target for next five years likely because of increasing growth challenges and geopolitical volatility. I think Beijing may later set a growth range between 5.5% and 6.5% for the medium-term to anchor macroeconomic policy in the new FYP. Industrial migration and, hence, reverse urbanisation to the inner parts of the country to spread income and consumption growth more evenly will be key trends to monitor for investing in the domestic-oriented sectors.
This has been reiterated as the strategic policy direction for the medium-term, emphasising on the internal circulation (i.e. domestic demand) while continuing the push for (but not relying on) the external circulation through opening up the domestic system, the Belt & Road Initiative, and renminbi internationalisation.
The internal circulation emphasises on high-end manufacturing and technology, and redirecting Chinese consumers’ overseas spending to the domestic market. It is clearly positive for domestic retailers and companies catering for Chinese buyers who previously bought items abroad, but negative for those companies and countries whose retail business depends on Chinese tourists.
As China steps up efforts to substitute imports and strengthen self-sufficiency, domestic brands in technological and financial innovation, industrial consolidation and consumer-upgrading should drive the long-term trend of China’s equity market. This also argues for cutting exposure to firms that have high overseas exposure, such as consumer electronics, and increase allocation to companies and sectors that are related to state investment in the priority sectors on the policy agenda, such as aerospace, defence and domestic high tech industries.
Technology innovation and self-sufficiency
This priority means industrial consolidation and upgrading and innovation and technological independence are set to speed up and as a strategic pillar for future development. They will mean higher R&D spending by the government in the next 5-10 years, with focus on the new infrastructure of AI, cloud computing, 5G networks, digitisation (including but not limited to a digital renminbi) and big data.
Green economy and climate change
The Plenum calls for acceleration of carbon emission control by 2035 by setting higher standards of environmental protection and pollution emission, including higher share of non-fossil energy share in total energy consumption, and further reduction of energy use per unit of GDP and CO2 and SO2 emission. This is positive for investment in related equipment and services.
Chi Lo, Senior Economist for Greater China
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.
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