First Insights-China:Key takeaways from the Guidelines for the 13th Five-Year Plan

Yesterday evening the official Xinhua news agency released the Chinese Communist Party’s guidelines in drafting the 13th Five-Year Plan (13FYP) as well as President Xi’s explanation of the guidelines to Fifth Plenum participants. Here are our thoughts on some of the key issues.

    GDP growth targets for 2016-20

    During his explanation, President Xi mentioned that “from the perspective of the need to double GDP, the bottom line for annual average economic growth between 2016 and 2020 is more than 6.5%.” He also expressed that “it’s possible for China’s economy to maintain growth of around 7% but it also faces many uncertainties”, such as sluggish global trade, the high leverage problem and rising economic risks.

    This statement is actually a little stronger than we had expected, though there is still some flexibility for growth in each individual year given that the floor to growth seems as if it will be set at an “annual average” over the period, rather than at specific targets for each year. At this stage, the government may still be able to achieve higher growth in the short run by ramping up stimulus, but that would likely further worsen fundamentals and be akin to borrowing growth from the future. That said, judging from the guidelines in general it seems to us unlikely that the government would try to stimulate growth through irresponsibly easing policy too far. As such, we believe the government may occasionally miss its growth targets in some years, bringing an element of uncertainty to macro policy. We also see some upside risk to our forecast of 5.8% GDP growth in 2016 and 5.6% for 2017 as the government may implement a stronger stimulus package than we have factored in should growth fall far below target.

    Economic, financial and social reforms

    Consistent with the comprehensive reform package unveiled at the Third Plenum in 2013, the guidelines for the 13FYP provide more detail. Most were well telegraphed such as the retirement of the one-child policy, rural land reform, urbanisation measures and SOE reform (see China: Preview of the Fifth Plenum, 22 October 2015).

    The guidelines clearly show the government’s intent to encourage innovation and cultivate new growth engines. To this end, it vows to support corporate R&D as well as scientific research carried out by universities. The government will also construct next-generation information infrastructure and carry out an “Internet+” action plan. Efforts to find breakthroughs in core technologies will be accelerated, covering a range of areas including information communication, energy, new materials, aerospace and airplanes, bio-pharmaceuticals and intelligent manufacturing.

    The guidelines also indicate the government’s determination to develop deep financial and capital markets, as well as opening up the financial sector to foreign and private capital. On financial sector reform, it seems the government will strengthen the financial supervisory framework (there is a possibility it will reform segmented supervisory bodies), while also opening up the financial sector to more foreign capital. In particular, the government will make the RMB convertible under the capital account in an orderly way, promote RMB’s inclusion in the IMF’s SDR currency basket and loosen foreign exchange quotas for Chinese overseas investment.