From Macquarie:
Takeaways from the 13th 5-year Plan Today China published the proposal for the 13th Five-Year Plan. Below are our takeaways from the proposal.
On growth target: Now the dust is settled as President Xi made it clear that the average growth rate for the next five years should be higher than 6.5%. We see it as a quite ambitious task. Infrastructure investment, as the main growth buffer, has grown 20% annually since 2013. But this year China’s infrastructure investment would exceed US$2tn, which is about the whole Indian economy. As such, the room for policy stimulus is much more limited compared with five years before. In our view, even China could grow 6.5% on average for the next five years. It’s not very likely to grow 6.5% every year, let alone every quarter. Most likely, policymakers will have to tolerate lower growth for an extended period, implement difficult reforms, then hope for the best. As such, we expect the fluctuation of China’s headline growth number will increase, maybe a lot, after the 19th Plenum in 2017.
On financial reform: The plan vows to develop the high yield bond market in China, which is new and an encouraging movement. In many aspects, shadow banking in China is similar to high yield bonds, just with much lower transparency. It’s desirable to replace that with a real high yield bond market. However, the plan doesn’t mention the IPO reform, probably reflecting the cautiousness after the recent stock rout. Meanwhile, President Xi called for a more integrated financial regulation framework, which might signal a potential merge of the current One Bank (PBoC) and Three Commission (CSRC, CBRC and CIRC) system into a super financial regulator.
On one-child policy: Policy makers are clearly concerned about the prospect of an aging society. From the partial relaxation of one-child policy in Nov 2013 to Aug 2015, only 15% qualified couples have applied for the 2nd kid. Given 90mn couples would be impacted after the full relaxation this time, such a low take-up rate implies that annual new birth could only increase by 1-2mn in the next decade due to the policy change. No wonder to us the plan says that the government would postpone the retirement age gradually, which could be quite unpopular but necessary.
On new growth drivers: As targets for industrial policies, the plan highlights areas such as semi-conductor, mobile communications, numerical control machine, nuclear power and pharma R&D. Meanwhile, like past 5-year plans, it also lists a dozen “strategic” industries including new energy and bio-tech, as well as those catchy words like Internet+, manufacturing 2025 and one belt-one-road. In our view, while all these could be useful, it’s much more important to reduce the misallocation of resources in the economy through financial reform, Hukou reform and SOE reform.
On urbanization: Currently, around 60% of China’s population (830mn) still holds rural Hukou (household registration). The plan vows to lower the ratio but lacks concrete details. In our view, it requires fiscal reform as Hukou is mainly about the welfare program and education opportunity provided by local governments. Land reform is also needed as farmers need to sell their land to settle down in cities. Without these difficult reforms, it’s hard for urbanization to go very far. Meanwhile, for the next five years, we see urban-urban migration (smaller to bigger cities) would be at least as important as rural urban one.
Two word for ya: glide slope. Lower and less commodity intensive growth and both of them lower than headlines numbers make it appear.
