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Uncertainty over how China will achieve five-year plan

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China last week unveiled plans to slow its rapid growth rate, but concerns remain over how Beijing will achieve this goal.

The Chinese National People’s Congress voted overwhelmingly to approve the country’s 12th five-year plan, which lowers the GDP growth target and includes several measures to rebalance its economy, the world’s second largest.

Included in the strategy are meas­ures for China to boost domestic demand, increase attention on social concerns, keep inflation below 4% and improve the country’s environmental record.

Alastair Chan, an economist at Moody’s Analytics, says it is “not clear” how China will be able to ­rebalance its economy as this was an aim of the previous plan, “during which the economy became even more unbalanced”.

Chan argues that the “most ­important and surprising” part of the new strategy is the average annual GDP growth target of 7%, down from the 7.5% goal set in the government’s 2006 five-year plan.

Kristof Bulkai, a manager of the Thames River Water and Agriculture Absolute Return fund, agrees that China’s focus on GDP expansion “at all costs” is one of the reasons why the last plan seems to have been unsuccessful in the areas of social reform and sustainable growth.

A comparison of China’s 2010 ­budget, the last year of the 11th five-year plan, and its budget for the coming year appears to support the notion that the country is moving towards this approach. (News analysis continues below)

The central government allocated 7.8% of its expenditure to social security and employment last year. This figure rises to 8.1%, or Rmb441 billion (£42 billion), for 2011. Smaller increases in budget allocations are seen for education, from 5.3% to 5.5%, and healthcare, from 3.1% to 3.2%.

In total, Rmb1.05 trillion of central government spending in 2011 has been budgeted in areas that “directly affect people’s lives”, including social security, education, healthcare, housing and culture.

However, the exact amount that will be used to improve the lot of China’s citizens remains unclear, despite the publication of the 2011 budget.

Even though the 12th five-year plan has been rubber-stamped, the budgets for the remaining four years are yet to be confirmed and could see the balance of expenditure shift to other areas.

 


Adding to the uncertainty is the vast amount of spending that is decided at local level. About 22.2% of 2011’s budget has been earmarked for general transfer payments to local governments.

It is unclear if these funds will be allocated to social security, education and healthcare or to other areas such as public security and defence.

Bulkai argues that Beijing will have to follow through on its stated intention of bolstering social insurance if it is to stimulate domestic demand successfully and thereby rebalance the economy.

China’s relatively low social insurance provision means many people save for precautionary reasons and keep their consumption relatively low.

Spending more on education and healthcare is essential if China is to increase domestic consumption, Bul­kai adds.

James Chong, the manager of the Martin Currie China fund, says China’s efforts to rebalance its economy may create good opportunities for investors.

Boosting domestic demand could make Chinese retailers and goods manufacturers an attractive proposition, he suggests.

Meanwhile, increased spending on housing may draw investors’ attention to building supplies companies, while food growers and producers may benefit from higher levels of spending at home.

However, Chan is less certain that the new drive to rebalance the economy will be immediately successful, noting that previous five-year plans have failed in this area. He says the most important step in lifting domestic demand will be to increase household incomes, which have trailed behind corporate incomes and GDP growth for some time.

“Undoing this will require many years of reform and could include policies such as higher minimum wages, increased dividend payments by state companies, higher interest rates to reward household savers and increased social spending,” Chan explains.

Even if Beijing is successful in its plans for reform, Chan remains doubtful that it will achieve the core aim of slowing growth and cooling China’s overheating economy.

Moody’s retains its ­forecast of 9.3% economic growth for 2011 and predicts that the economy will expand at 8.5-9% annually for the next few years, Chan says. Inflation may start to slow by the close of 2011, Chan says, but will still overshoot its 4% goal.

Despite the bold proclamations in its five-year plan, China’s economy could still be tipped too far on the side of growth to rebalance fully in the coming years.

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