Market Views: What China’s next five-year plan may bring

The Chinese government will next week discuss its economic and social development plan for 2021 to 2025 against a volatile global backdrop. Investment experts are mulling potential outcomes.
Market Views: What China’s next five-year plan may bring

China’s next big government policy-making get-together will take place next week, and it is set to be scrutinised more closely than ever given the febrile and tense environment globally.

The fifth plenary session of the 19th Central Committee of the Communist Party of China will be held from October 26 to 29. At the closed-door session, top government officials will be deliberating proposals for the 14th five-year (2021-2025) economic and social development plan and setting growth targets for 2035.

Xi Jinping has promised
emissions will peak in 2030 

There is a lot at stake, with China front and centre of world affairs as never before. The meeting will take place a week before the US presidential election on November 3 and against a backdrop of the Covid-19 pandemic, heightened political tension between Beijing and other governments (most notably Washington), and rising economic challenges at home.

That said, China is rebounding faster from the coronavirus crisis than most other nations. On Monday (October 19), Beijing announced that domestic GDP for the third quarter this year grew by 4.9% from the same period a year ago, up from 3.2% in the second quarter. And the International Monetary Fund on October 14 revised its GDP growth projection for 2020 for the country up to 1.9% from 1.0% in June, in contrast to forecasting a 4.4% drop in global GDP for this year.

To support economic growth, Beijing has been accelerating market opening. Sun Shuo, the mayor of Xi Cheng district in Beijing, said at a conference on October 22 that the city planned to launch 100 measures to open its financial services sector. They include relaxing market access for foreign financial institutions, facilitating cross-border capital flows, easing controls for foreign investment and financing, according to a local media report.

China has also unveiled a “dual circulation” strategy to cut its dependence on overseas markets while focusing on boosting consumer demand its domestic markets and technological improvements in its long-term development. This is a long-planned policy to move away from an export-driven economy towards a consumer-drive one that is being hastened by a deepening rift with the US. 

Accordingly, the session will likely prioritise domestic developments and measures to attract foreign capital, Stuart Leckie, chairman of Stirling Finance, told AsianInvestor. Amid a global pandemic, the country should set a stable rather than aggressive economic growth target, he added.

AsianInvestor asked several experts what key financial reforms or goals were likely to be included in the new plan and what were the critical areas of focus for investors.

The following contributions have been edited for clarity and brevity.

Xia Chun, chief economist
Noah Holdings

We are expecting the next five-year plan to set a more moderate economic growth target of 5%. The government will focus on three main areas aimed at further stabilising the economy and society. These are land allocation, education and self-reliance in technology.

Although China is unlikely to repeat the growth rate of the recent past, we remain positive on its economy, and we believe that by 2022 the country will be able to adjust to a new normal under Covid-19. During that time, China will keep developing its “dual circulation" strategy and reducing its reliance on exports and globalisation.

For financial markets, we expect the government to optimise its schemes to open up the capital market. Land allocation and property market adjustments will remain one of the most important topics in the coming years. How to set a balanced land allocation system and to encourage a healthy property market will still be a challenge.

The US-China tensions and concerns generated from the trade war have created higher-than-expected investment uncertainty, and we believe foreign investors will need time to digest China’s market changes, both from a political and economic perspective.

Chi Lo, Greater China senior economist
BNP Paribas Asset Management

Policies will need to focus on sustainable growth and improving public confidence – both domestic and foreign – under the “dual circulation” strategy in the following areas: urbanisation, environmental protection, upgrading technology, financial risk controls and continued capital account liberalisation.

The following would help bolster investors’ confidence in Chinese assets: policies to develop the metropolitan areas and city clusters, the relaxation of hukou restrictions to increase labour mobility and foster job growth, plans to boost SME and private-sector growth, and state-owned enterprise reform.

Measures to deepen financial reforms by boosting the role of capital markets and reducing reliance on banks for funding will also go a long way to correct the capital misallocation problem.

China will also need to deliver on its environmental protection pledge, notably climate change controls, which would improve its international credibility. This, combined with continued efforts to open up its financial markets, would help to attract both foreign direct investments and portfolio inflows.

We also believe increased spending on research & development and education to upgrade technologies – especially in bottleneck areas like semiconductors, robotics, artifical intelligence, 5G and advanced manufacturing – will boost the new economy, and thus widen the investment scope for investors.

Beijing should also help Chinese corporates to digitise their businesses and increase innovation to improve efficiency and reduce costs, and thereby increase Chinese asset values.

Desiree Wang, China country head
JP Morgan Asset Management

We expect China’s strategic economic priorities to include fostering domestic demand, market-oriented reforms, digitalisation and technological innovation. To achieve these goals, China will advocate further financial liberalisation. The authorities will also remain focused on attracting foreign investments into the country’s stock and bond markets.

Meanwhile, to boost consumption, improving social security will be essential to convert savings into spending. Pension reforms and the introduction of long-term retirement saving incentives would not only further this objective, but also direct money to support the economy.

In addition to the economic objectives, environmental protection is likely to be another focus area. In September, President Xi [Jinping] announced that China’s carbon emissions would peak by 2030, and it will seek to achieve carbon neutrality by 2060. We believe policies around sustainable investing and ESG will be considered to encourage institutional investors to exercise their positive influence in the capital market.

David Lee, counsel
Sidley Austin

China has taken significant steps to relax foreign investment restrictions in many different industries. One area that will further improve and promote foreign institutional investment would be to relax further the requirements for foreign investors to set up investment holding vehicles in the country. 

In the past, there were strict restrictions on the types of vehicles – often subject to stringent capital and qualification requirements – that can be established by foreign investors to engage in investment holding activities.

Recently, there appears to be a possibility for foreign investors to establish other types of vehicles to engage in investment holding activities in China. If the regulations clarify the framework and specifically allow foreign investors to use less restrictive vehicles for holding investments, it would generate even greater interest among foreign institutional investors to invest in the country. 

Another move that would help promote capital inflows would be to further relax the rules on foreign investments into the telecommunications industry. Many foreign investors are interested in investing in internet technology and other types of telecoms business in China.

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