Out with the old…
Diamond Lee, Manager, Old Mutual Greater China Equity Fund
Every five years, around the end of October, market watchers turn their attentions towards China and the closely-guarded contents of the new five-year plan, essentially a meeting of top level members of the Communist Party in which social and economic development initiatives are agreed upon for the next half decade.
This year, the thirteenth, diarised for the 26 – 29 October, will be more eagerly awaited than most. Investors will want reassurance on how the authorities are going to tackle the issue of China’s slowing growth rate, likely to be set at 6.5% - 7% for the next five years, and whether or not the country’s transition from an export-driven economy to one based on domestic consumption is still on track.
Particular attention will be paid to how exactly the authorities intend to promote China’s ‘new’ economic industries – technology, healthcare, media and communications – at the expense of the ‘older’ more traditional industries of steel, shipbuilding and coal. These industries have, until recently, been the typical drivers of China’s growth rate.
Technology reform is rumoured to feature highly, with the acceleration of consumer information infrastructure – faster broadband, 4G networks and cloud computing. The push to integrate big data in conjunction with data-intensive sectors such as telecommunications, financials, transportation and healthcare is also likely to be high on the agenda.
The provision of better quality healthcare, which fits in with the government’s ambition of being a ‘moderately prosperous’ country by 2020, is also a favoured area for reform. For those with the wherewithal to pay – increasingly, China’s growing and more affluent middle classes – this will be welcome, particularly in the areas of health assurance and in the encouragement of proprietary innovation in the pharmaceuticals sector.
While infrastructure spend as a proportion of fixed asset investment continues to decline, regional developments are being openly encouraged, not least with the One Belt One Road (OBOR) initiative. A major construction plan to rebuild the old Silk Road trade links between Europe and Asia, investors will be keeping a close eye on OBOR-related investment increasing in the 13th Five-Year Plan.
The long-standing issue of reform of state-owned enterprises (SOEs) reflects the complex nature of their make-up and revolves around key questions such as ownership, income distribution, and employment issues. Whether the SOEs are the large centralised behemoths involved with coal, iron or steel production or the smaller, local SOEs such as hotels and restaurants, the key reforms need to address the overriding problem of overcapacity, how to introduce technological innovation and above all how to focus on profit not sales maximisation.
One area where industry overcapacity is not a problem is that of environmental protection. Despite some improvement, pollution levels in China remain uncomfortably high and it is possible that spending to improve the environment may increase to a hefty 2 or 2.5% of GDP. With targets for water, air and soil quality likely to be clearly defined, specific work could include methods for treating pollution, reducing emissions, improving environmental quality and ecological protection.
When, and how many of, these reforms will be implemented remains to be seen. The hope is that China’s economy may become more open and transparent, more skewed towards private enterprise and with a greater reliance on private financing. For investors, the transition from the old to the new will take time as companies start to adjust to a more modern way of doing business. The road may be bumpy but investors will do well to remember that sacrifices being made now should result in long-term rewards.