In July this year, the Communist Party of China (CCP) will commemorate its 100th anniversary – and considering the global superpower is poised as one of world’s most robust economies after the pandemic, we can expect to see a party [pun intended] to fit the occasion.
In the lead-up to its centenary, the CCP announced its 14th ‘Five Year Plan’ just over a week ago, an event which affects investors across the globe as the world’s most economically aggressive nation lays its cards on the table.
Today, we will summarise the major targets of the 2021-25 plan, as well as touch on some of the implications to investment into China and Asia-Pacific as a result.
The Eight Targets
The Five Year Plan (FYP) is thousands of pages long touching on a wide range of topics from the status of previous goals to expanding on major and minor goals for the next five years.
Considering the theme of this note, going over eight of the largest targets seems appropriate.
In no particular order:
For the first time in decades, no firm target was set for GDP.
Rather, the commitment is to “a reasonable annual target range” – whilst this allows for greater fluctuations in headline GDP growth over the next five years. Market consensus is that the unofficial target is above 6% per annum. To put this in perspective, the U.S has only exceeded 3% p.a. twice since 2006 and Russia has not exceeded 4% p.a. since 2012.
2. Urban Population
China’s ongoing ‘national rejuvenation’ goals heavily involve the urbanisation of its population to city-centres.
The target has increased from 60% (achieved in 2020) to 65% of the population – for those paying attention to Asia-Pacific infrastructure investing, this is one key driver of increased spending around urban clusters.
A new inclusion to the FYP, the target is to keep the unemployment rate in urban areas below 5.5% – this will form the basis of future monetary policy and we can speculate that as the urban population grows, enticed by newly created jobs designed with the specific purpose in mind of bringing them into city clusters.
4. Share of Digital Economy
Another new addition to the FYP, China has long been touting its desire to be a leader in global technology innovation – from AI to the first Central Bank Digital Currency (CBDC).
The official target in the FYP was to have over 10% share of the global digital economy by 2025, with specific attention to blockchain, AI, cloud computing and financial technology (“fintech”). This is also supported by officially targeting 7%+ annual growth in R&D funding across the economy.
5. Green Development
China has announced its desire for carbon emissions to peak by 2030, and decreasing carbon emission intensity (a measurement per unit of GDP).
This has resulted in an official target of reducing energy consumption per unit of GDP by 13.5 – 18% by 2025.
Another target which the population would be glad to hear is the percentage of ‘good quality air days per year; increasing from levels of 84.8% in 2019, the target is now 87.5% of the year by the end of 2025.
6. Life Expectancy and Retirement Age
As part of their desire to become a ‘fully modernised country’ by 2035, this FYP has announced China’s desire for people to live and work longer.
One express intention is to raise the life expectancy of all citizens (currently 77) by one year by 2025. This is keeping approximate pace with the increase of 1 year per 3-4 years in urbanized areas – and considering the ease of healthcare and census taking in urban areas versus rural areas in China, this ties into their urbanization theme.
The other target has been to increase the retirement age across men and women and across all sectors – for decades the retirement age has been capped at 55 for women and 60 for men. To make the Chinese pension plan sustainable (95% of citizens will have access to basic pension), the latest FYP looks to increase this age, though the numbers are not firm as of yet.
7. More Babies
In stark contrast to the ‘one child policy’ that only ended in 2015, Beijing are looking to increase the population fertility level – for now this has only been tabled as an ‘appropriate level’ until their latest population census data comes through.
We can speculate that China, like much of the world, is looking to manage its ageing population demographic through an increase in birth rates, to support and sustain future economic growth.
8. Political Development
Geopolitical risk is something any international investor needs to consider, and in particular, China’s political actions can have dramatic effects on global markets and relationships well beyond those of Asia-Pacific.
Part of the latest FYP is an increase in political pressure and control over regions outside of Mainland China, with Hong Kong the most directly in sights and Taiwan as a close second. Though the Hong Kong exchange is likely to remain as a free-market to global investors, Hong Kong itself will have a drastically different legislative system geared towards Beijing-endorsed members of parliament. Taiwan has also been billed as a project to ‘prevent external interference’, which from a purely investment focus may impact global semiconductor markets considering Asia’s reliance on Taiwan Semiconductor Company (TSM:NYSE).
Impacts on Investment
There are some key takeaways from what the CCP is indicating in their latest plan.
If you’re bullish Asian tech, then you’re a winner under the FYP.
The commitment to a share of the digital economy, the introduction of the digital RMB and a suite of government-endorsed technologies will drive innovation and demand in the future. This plays well into China’s desire to become a modernised country, since they will look to leverage their existing technological expertise and R&D funding into further commercializing their high-tech industries.
If you’re bullish Asian healthcare and education, then you’re a winner under the FYP.
Increasing urbanisation, fertility and life expectancy all play into the growth of modern healthcare capabilities in China. We can expect aged care to make an increasingly large impact on the balance sheets of Chinese families, as more children are born into city clusters then education systems will become more robust and better funded. We can expect to see urban infrastructure spending being dedicated to improving healthcare and education systems in future.
If you’re highly exposed to political risks, you may be wary.
Those invested into companies/industries in Hong Kong and Taiwan which deal with foreign parties such as the U.S, may be concerned based on renewed and officially publicized intent from China to exert more control over these regions. Politics and economics may clash where it is aligned with Party’s interests, in particular the maintenance of Hong Kong as a financial hub – but suffice to say it is certain that the regions as we know them today will look vastly different by the end of this period.
The last note would be that China is opening up investment opportunities that may not have been readily apparent before. For example, their focus on carbon emission reduction implies a growth runway for green energy and cleaner ways to produce materials in the future.
We can expect more news and confirmations of intentions around the centenary anniversary – so for now pay attention to the risks and opportunities, knowing that in a few months the entire region will be awash with celebrations for the biggest birthday party ever thrown in the modern world.
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