The fifth plenum of the 18th Communist Party Congress concluded on 29 October 2015. One headline outcome was the abolition of the one-child policy, a major step towards better-balanced demographics. However, for us, the most significant announcement was the annual GDP growth rate target of at least 6.53% in the next five years to meet the government’s goal of establishing a “moderately prosperous society”. Other major policy focuses were highlighted such as the support to innovative industries, state-owned enterprise reforms, building a more sustainable social welfare system and environmental protection. Overall, there was little that was new here, more a confirmation of the continuation of the rebalancing of the economy, targeting a lower quantity of growth but gaining more of that growth from higher value-added sectors.
Minimum 6.53% for the next five years
The fifth plenum session, at which the draft of the next five year plan is reviewed (2016-2020), appeared to suggest a new target annual GDP growth rate of at least 6.53% for the next five years in order to achieve a “moderately prosperous society”.
While no explicit growth target was stated, the government is aiming to double China’s 2010 GDP-per-capita rate by 2020, which implies a minimum of 6.53% annual economic growth.
Exhibit 1: YoY GDP growth (%) and minimum target
Source: Fifth plenum, Bloomberg, 30 October 2015
Two children per family
China is facing demographic pressure with a birth rate at 1.237, which is lower than the international average of 1.92. With an ageing population, a better balanced demography would be difficult to achieve if the one-child policy were retained. For that reason, the fifth plenum decided to abolish the one-child policy, which had been in place since 1978, and allow all families to have up to two children.
Exhibit 2: China: number of births in millions; birth rate in %
Source: NBS, BNP Paribas Investment Partners, 30 October 2015
However, we believe that urban Chinese people may remain inclined to have only one child. The slight change in 2013 to the one-child policy, which allowed people to have two children in cases where one of the parents was an only child, failed to achieve the planned two million babies born in 2014; in reality only 400 000 babies were born. We thus believe we will only see a meaningful outcome from this reform over the long term.
Other takeways from the 5th plenum
The plenum again highlighted the reforms designed to help the government rebalance the economy. While it will be some further weeks before more details are released, the main focuses of the five year plan will be:
– Consumption: proportional contribution to GDP growth should continue to rise, and more households should participate
– Support to emerging industries by establishing economic development zones
– Push for innovation and implement “internet plus” plan
– Build a social welfare system and improve the pension system; the government intends to inject some state-owned capital into pension funds
– Continue to improve the management of state-owned companies and reform the financial regulation system; build a modern fiscal and taxation system
– Protect the environment
We believe China will continue to shift from a quantity to a quality growth model by focusing on the rebalancing of the economy from investment to consumption. Consumption will continue to be a major driver of GDP growth (it represented 51.2% of GDP growth in 2014).
The recent interest rate and reserve requirement ratio cuts are expected to help to reduce borrowing costs, prop up the real economy and stabilise growth in China. In the current volatile currency and market environment, we expect domestic liquidity to remain sufficient and the government to take further steps on reforms. We believe the government is likely to continue to pursue a loose monetary policy and increase targeted and effective (rather than broad-based, as in 2008/9) fiscal easing.
We think China A-shares are in general slowly but gradually stabilising. The downside risk should be limited for blue chip stocks as their valuation is already low. We think opportunities also exist among the stocks of small and medium-sized companies, although these might be limited as the rebound in recent weeks has already lifted these stocks’ valuations.