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China's Fifth Plenum: what investors need to know

China's Fifth Plenum: what investors need to know

China held its fifth plenary session this week, where the ruling Communist Party decided the details of its 13th Five Year Plan behind closed doors.

Full details of the decisions the government has made will not be released until March next year, but leading fund managers have already started making predictions.

Head of Greater China equities at BNP Paribas Investment Partners, Caroline Yu Maurer, thinks the meeting will serve to reinforce previous messages made by the government.

‘There are unlikely to be any specific targets announced, as the plenum is meant to set policy directions, not implementation targets. They are likely to reiterate the structural reform measures and directions that have been announced before, to reinforce their commitment to structural rebalancing.’

‘Areas such as education, IT, e-commerce, green industries, infrastructure spending that facilitates urbanisation, capital market reform, deleveraging - especially by the local governments - and capital account liberalisation are likely to be emphasised again,’ Yu Maurer told Citywire Global.

However, the biggest change could be the GDP target rate, she said. ‘The leaders may come up with a growth range between 6-7% for 2016.‘

‘Giving a range rather than a hard target will give them the policy flexibility to react to the changing economic environment,’ Yu Maurer added.

Revised figures

Citywire A-rated Jian Shi Cortesi, who runs the Julius Baer EF China Evolution fund, agrees with a revised growth rate, but thinks other statistics are equally as important. She added that last year’s growth target of 7.3% was missed and this has become a fixation in markets.

‘People pay too much attention to the growth rate. As China is a developing country, people say that the data cannot be of the same quality compared to developed countries. We like to focus on employment figures, income figures and corporate earnings levels.’

‘The government will probably lower the GDP target from 7 to 6.5%. China is moving to a service economy. The service industry is still labour intensive. Employment is still quite healthy despite the slowdown,’ Cortesi told Citywire Global.

Head of emerging markets at Hermes IM, Gary Greenberg, thinks growth in China is still positive. After cutting his exposure to the country in the Hermes Global Emerging Markets fund in May, he has increased it as stock prices have corrected.

‘If you look at the composition of Chinese growth the service sector is growing at about 12.5% and the industrial sector is growing at about 2%.’

‘Since they are both about half of the economy that gets to about 6.5% growth if you weight them. Over the next five years we will see the target revised down to 3.5-4%,’ he told Citywire Global.

No more lonely only

The first announcement to come out of the 5th Plenum is the scrapping of the one-child policy, which Cortesi believes will boost consumption.

‘Baby food and baby products are the obvious beneficiaries. China consumes about $19 billion of baby food annually already. Consumption in many other areas will benefit also, although to a smaller extent. Auto, i.e. larger cars, housing, so more living space, insurance, etc.’

Greenberg thinks the benefits of the policy change will take many years to come through and could cost the government in the short term.

‘They will need to offer subsidies to families because it is no longer an agricultural economy so more kids are not necessarily an advantage. If you look at prices in the city they are very high, so squeezing an extra person into a 40 square meter flat is not going to be easy.’

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