Economic activities in China can be traced back more than 4,000 years ago. In this context, the 60 years since China’s first economic plan was implemented in 1953-57 is merely a wink of the eye. Completion of China’s 11th five-year plan in 2010 has seen spectacular progress made. As summarized in Table 1 below, China was the 2nd largest economy in the world in 2010 and its economy is expected to grow by 136 percent from 2010 to 2016.

It is noteworthy that 30 years ago in 1981, the GDP of China was US$168 billion¹ compared to the US GDP of $3 trillion and Canadian GDP of $300 billion. China’s major accomplishments since 1981 include joining the World Trade Organization in December, 2001. On Dec 6, 2011, Standard & Poor’s confirmed its sovereign rating for China as AA-, according it credit for its resilience in the 2008-09 global financial crises. Shenzhen, Shanghai and Beijing are the 4th, 5th and 6th leading Asian financial centres according to the Global Financial Centers Study of March 2010².

It is important for investors to examine the implications of China’s new five-year plan in light of China’s rapidly growing economy and its influence on international capital markets.

The 12th five-year plan (2011-2015) in China

In March, 2011, the National People’s Congress (the top legislature) in China approved the implementation of its 12^th five-year plan (2011-2015)³.

The emphasis of this medium-term plan is on rebalancing towards economic activities that (a) cater to domestic demands, (b) achieve a better balance in population livelihood and environmental protection, with (c) less emphasis on growth.

Some of the key economic targets of the 12^th plan are outlined below,

• Average annual GDP growth rate of 7 percent (the 11th plan target⁴ was 7.5 percent);
• More than 45 million jobs to be created in urban areas and urban registered unemployment not to exceed 5 percent;
• Service sector value-added output to reach 47 percent of GDP (the 11th plan target was increased from 40 percent in 2005 to 43 percent in 2010). Table 2 shows comparative statistics on service sector as a percentage of GDP;
• Value-added from emerging strategic industries is expected to grow to 8 percent of GDP;
• Foreign investment will be encouraged to modernize agriculture, high-technology and environment protection industries;
• The emphases of development in coastal regions will be on R&D, high-end manufacturing and service sectors;
• The urbanization rate will reach 51.5 percent (the 11th plan target was an increase from 43 percent in 2005 to 47 percent in 2010).

Specific targets are also established for environmental protection and energy use, outlined below,

• Non-fossil fuel to account for 11.4 percent of primary energy consumption;
  • There will be efficient development of nuclear power;
  • There will be more large-scale hydro power plants constructed for the southwestern region;
• Water consumption per unit of value-added industrial output will be reduced by 30 percent;
• Energy consumption per unit of GDP will be reduced by 16 percent;
• Carbon dioxide emission per unit of GDP will be reduced by 17 percent;
• The forest coverage rate will rise to 21.66 percent and the forest stock will increase by 600 million cubic meters;

Opportunities and challenges

The scale of the new 5-year economic plan in China is certainly very substantial and far-reaching. It has been reported that China has more than 170 cities with a population of more than 1 million. The implementation of the plan will require multilevel jurisdictional involvement and extensive public-private and international participation. The following three broad investment themes can be identified,

Investment opportunities:

• It is reasonable to expect that with the continuing growth in affluence of the population stemming from increasing urbanization trend, consumer related sectors including health-care spending will be well supported. Increasing demand is also expected for IT products and solutions required for improving manufacturing efficiency and for retail use;
• With a new focus on China’s manufacturing and industrial activities, there may be new products requirements from neighbouring states. There may be increasing activity in China to leverage on the strength of the advanced manufacturing and service sector in Japan and corresponding financing activities in Singapore and Hong Kong;
• There is a clear and firm commitment in China to increasing the use of green energy. Initiatives are expected to encourage increasing urbanization which provides economies of scale, resource conservation including the use of water and the renewable energy sector.

The following two potential constraints in investment are identified:

• The stage of economic development and activity in inner provinces may be different from cities in the coastal regions. This may result in longer than planned time horizons in the implementation of the new plan;
• The strategic initiatives for the gradual, steady development towards convertibility of the Renminbi (“RMB”) may present an investment constraint for offshore investors. However, so far it is noted that China permitted trading of RMB in the US⁵ in 2011. Also, there is a growing dim sum bond market for offshore investors⁶ following the Chinese government’s approval in Feb 2010 of foreign companies issuing RMB bonds to offshore investors, primarily through the Hong Kong market.

References:

1. The outline of the eleventh five-year plan for national economic & social development of the people’s republic of china – National Development and Reform Commission (“NDRC”) People’s Republic of China
2. ‘America versus Japan: A comparative study of business-government relations conducted at the Harvard Business School’, edited by Thomas McCraw, Harvard Business School Press, 1986
3. ‘How countries compete: Strategy, structure, and government in the global economy’, Richard HK Vietor, Harvard Business School Press, 2007.

Footnotes:

¹ IMF World Economic Outlook Databases, updated Sept 20, 2011
² Global Financial Centers’, study conducted by City of London, UK, March 2010
³ www.xinhuanet.com
⁴ The Outline of the Eleventh Five-Year Plan for National Economic & Social Development of the People’s Republic of China – National Development and Reform Commission (NDRC) People’s Republic of China
⁵ Wall Street Journal, Jan 12, 2011
⁶ Bloomberg articles reported that World Bank, Asian Development Bank, McDonalds, Caterpillar were dim-sum bond issuers.
⁷ www.worldbank.org