China Macro:Takeaways from the 13th 5-year Plan

On growth target: Now the dust is settled as President Xi made it clear thatthe average growth rate for the next five years should be higher than 6.5%.

We see it as a quite ambitious task. Infrastructure investment, as the maingrowth buffer, has grown 20% annually since 2013. But this year China’sinfrastructure investment would exceed US$2tn, which is about the wholeIndian economy. As such, the room for policy stimulus is much more limitedcompared with five years before. In our view, even China could grow 6.5% onaverage for the next five years. It’s not very likely to grow 6.5% every year, letalone every quarter. Most likely, policymakers will have to tolerate lowergrowth for an extended period, implement difficult reforms, then hope for thebest. As such, we expect the fluctuation of China’s headline growth numberwill increase, maybe a lot, after the 19th Plenum in 2017.

On financial reform: The plan vows to develop the high yield bond market inChina, which is new and an encouraging movement. In many aspects,shadow banking in China is similar to high yield bonds, just with much lowertransparency. It’s desirable to replace that with a real high yield bond market.

However, the plan doesn’t mention the IPO reform, probably reflecting thecautiousness after the recent stock rout. Meanwhile, President Xi called for amore integrated financial regulation framework, which might signal a potentialmerge of the current One Bank (PBoC) and Three Commission (CSRC,CBRC and CIRC) system into a super financial regulator.

On one-child policy: Policy makers are clearly concerned about the prospectof an aging society. From the partial relaxation of one-child policy in Nov 2013to Aug 2015, only 15% qualified couples have applied for the 2nd kid. Given90mn couples would be impacted after the full relaxation this time, such a lowtake-up rate implies that annual new birth could only increase by 1-2mn in thenext decade due to the policy change. No wonder to us the plan says that thegovernment would postpone the retirement age gradually, which could bequite unpopular but necessary.

On new growth drivers: As targets for industrial policies, the plan highlightsareas such as semi-conductor, mobile communications, numerical controlmachine, nuclear power and pharma R&D. Meanwhile, like past 5-year plans,it also lists a dozen “strategic” industries including new energy and bio-tech,as well as those catchy words like Internet+, manufacturing 2025 and onebelt-one-road. In our view, while all these could be useful, it’s much moreimportant to reduce the misallocation of resources in the economy throughfinancial reform, Hukou reform and SOE reform.

On urbanization: Currently, around 60% of China’s population (830mn) stillholds rural Hukou (household registration). The plan vows to lower the ratiobut lacks concrete details. In our view, it requires fiscal reform as Hukou ismainly about the welfare program and education opportunity provided by localgovernments. Land reform is also needed as farmers need to sell their land tosettle down in cities. Without these difficult reforms, it’s hard for urbanizationto go very far. Meanwhile, for the next five years, we see urban-urbanmigration (smaller to bigger cities) would be at least as important as ruralurbanone.