China business: Chasing a moving target

By Raymond Yeung

Exporters should keep their sights on changes brought by Beijing’s aggressive economic targets and growing focus on productivity, urbanisation and the service sector, writes Raymond Yeung.
China plans to add 100 million to the urban population by 2020. Photo / Mark Mitchell
China plans to add 100 million to the urban population by 2020. Photo / Mark Mitchell

China's 13th Five Year period is getting under way amid concerns about the country's growth prospects. Though growth is not expected to match the high levels of the recent past, it is still high by global standards.

The key to identifying and executing opportunities for New Zealand lies not in focusing on headline growth, but in understanding Beijing's ambitious targets and moves to refocus the Chinese economy.

Against the backdrop of President Xi Jinping's stated ambition to double GDP per capita from its 2010 level by 2020, the National People's Congress conclusion last month was particularly important.

The Government Work Report, delivered by Premier Li Keqiang, laid out policy targets for 2016 and the rest of the 13th Five Year period.

To stabilise employment and expedite structural rebalancing, GDP and CPI are targeted to grow by 6.5 to 7 per cent and 3 per cent respectively in 2016, higher than our forecasts of 6.4 per cent and 2.1 per cent. China also aims to create 10 million new urban jobs, the same as last year.

The credit target is set at 13 per cent, higher than last year's 12 per cent. With this target, China needs to lift nominal GDP by about RMB6.6 trillion in 2016, more than last year's rise of RMB4.1 trillion.

In a deflationary environment with sluggish growth momentum, these aggressive targets require significant policy support.

Monetary policy, in our view, will continue to be more flexible in 2016, though the timing of traditional monetary policy easing such as changing the reserve requirement is relatively uncertain.

As for fiscal policy, we expect this will become even more proactive given the fiscal deficit is budgeted as 3 per cent of GDP or RMB2.18 trillion, higher than the planned RMB1.62 trillion (2.3 per cent) in 2015.

Though the Government is planning RMB800 billion of railway investment and RMB1.65 trillion for highways, around RMB500 billion of deficits will stem from lowering the tax burden.

Raymond Yeung.
Raymond Yeung.

Local government bond issuance will play a significant role in fiscal policy. This is a "two-birds-with-one-stone" policy, as it will not only develop the funding mix of fiscal finance but also nurture China's capital market.

Premier Li has said local government bond issuance will reach RMB400 billion in 2016 and the local government debt swap programme will continue. China will also explore a securitisation of state assets.

Despite the strength of the targets that have been set, we believe that a large scale stimulus programme is unlikely. Premier Li reiterated this point recently, and this is consistent with the policy tone of the past two years.

During the latest Five Year period, China will continue to navigate through a period of short-term pain for long-term gain. The supply-side structural reforms are designed to lift productivity and value added per unit of factor inputs (that is, labour, capital, natural resources) rather than production volume.

Cutting excess capacity is one of the top priorities on China's policy agenda, and service industries are expected to outperform manufacturing.

Indeed, services constituted more than half of GDP and contributed 4.2 percentage points to headline growth in 2015, while manufacturing's share dropped to 40.5 per cent and the sector contributed only 2.4 percentage points to overall GDP growth.

Given that cutting excess capacity will increase employment pressures, a growing service sector is expected to help absorb some layoffs associated with these cuts.

Services created an estimated 12 million jobs last year, according to government officials. At the same time, continuing large-scale urbanisation will spearhead China's investment pipeline.

The government plans to achieve an urbanisation rate of 60 per cent (currently 56 per cent) and add 100 million to the urban population by 2020. Some 30,000km of high speed rail will cover at least 80 per cent of big cities (2015: 19,000km).

The country plans to add 30,000km of new highway (2015 level: 120,000km) and achieve universal broadband coverage.

The Chinese economy presents a moving target for New Zealand businesses looking to secure future opportunities. The next few years will see it increasingly become a consumer-led economy.

By 2030, our projections indicate that China's urban disposable income will almost quadruple, with over 300 million new middle class consumers emerging in urban areas. This new class of consumers will spend three times as much in 2030 as they do now.

They will not only eat more and drink more, but also eat better and drink better. Premium agricultural products will continue to enjoy strong demand, providing ongoing opportunities for New Zealand to compete.

Large-scale construction driven by urbanisation will continue to offer solid demand for logs and represents a long term market for New Zealand forestry.

Concerns linger in markets over a slowing rate of growth in China. But, in the end, 6.5 per cent is still a high rate of GDP growth by global standards.

The government forecasts that China's GDP will reach RMB90 trillion by 2020, one-third more than 2015.

The risk for New Zealand businesses stems not from China's slowing growth, but from overlooking the new opportunities that are rapidly evolving from China's economic transformation.

Raymond Yeung is Acting Chief Economist Greater China, ANZ Research.

- NZ Herald

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