China: New Targets and Limited Stimulus

Published on October 30, 2015

Public statements coming out of the Fifth Plenary Session of the 18th Communist Party of China Central Committee meeting have been limited to broad social and economic goals such as social security, the environment, and the widely covered decision to abandon Beijing’s one-child policy that has been in place since 1980.

But the questions with the most direct relevance to markets are what growth targets President Xi Jinping and the CPC will settle on for the next five year plan, and what stimulus will be put in place in turn to achieve them.

*** From what we understand approximately one fifth of the Central Committee members advocated for keeping a 7% target for the 2016-2020 5-year plan, but the Plenary Session concluded with the recommendation the State Council submit a 6.5% “bottom line” target for the next five years for formal approval to the 12th National People’s Congress (NPC) in March of 2016. ***

*** When it comes to near term stimulus and economic policy, after last week’s interest rate cut and RRR cuts, Chinese economic policymakers are not planning any further rate cuts for the remainder of the year, although the PBoC is retaining the option for another 50 basis points cut in the RRR in late November or December. In regards to the currency, Chinese policymakers believe the RMB could climb to 6.3000 by year end, even if the US Federal Reserve were to hike rates at its December meeting. ***

*** The CPC Politburo did however, from what we understand, approve some further fiscal stimulus measures, namely the one trillion Yuan in tax cuts for State Owned Enterprises over the next six months that we have been flagging in reports since September (see SGH 9/17/2015, “China: Additional Fiscal Stimulus if Needed”). ***

Xi’s Five Points

Attendees of the meeting report that President Xi made five key points to the session on the medium term economic plan, which he said should double the level of the economy by 2020 from 2010 levels, and double the income of both rural and urban residents over the same ten year period:

First, China has entered a “new normal growth” environment that is slower but will be more sustainable and balanced than the growth rates of the past. This is the expected and desired result of a conscious and deliberate effort to restructure and rebalance China’s economic growth.

Second, the next five year period will focus on reforms and opening up the economy as it transforms from one led by exports and investment to relying on “quality and innovation,” with the growth momentum shifting to services, consumption, and high tech industries.

Third, a 6.5% growth target is more practical than sticking to a 7% growth rate, not just for domestic reasons but also due to headwinds and fluctuations in global growth. But, the lower 6.5% anticipated goal for all levels of government should be seen as a floor and that there is no expectation the economy will slip below that. Xi went on to remind that 6.5% would still be the highest growth rate among the major global economies, and that at the 6.5% pace China will still be forecast to contribute 30% of the growth of the global economy.

Fourth, in addition to broad reforms, Xi specifically pointed to measures such as speeding up urbanization to foster greater domestic demand, the “Belt and Road” initiative, the internationalization of the RMB, and the newly formed Asian International Investment Bank and Free Trade agreements.

Finally, Xi affirmed his confidence China would be able to hit its new 6.5% target, but granted that while the Fifth Plenary Session will recommend a 6.5% target to the full NPC in March, in the (unlikely) event more than half the NPC delegates still want to stick with 7%, they would do so.

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