If you’d other things to get this done weekend, like taking the kids to hockey, planning that last-minute winter vacation, or organizing your sock drawer, you may have missed the annual National People’s Congress taking place in Beijing.
The NPC is ostensibly the ultimate decision-making body in China, which meets annually to review and hang government policy. Of course, this really is China, so its power is basically ceremonials and its meeting is carefully orchestrated. Dissent is rare to non-existent: the 3,000 party officials gathered at the NPC wouldn’t think of challenging the authority of the Communist Party or President Xi Jinping, a minimum of not in public. You will find generally few surprises.
The Oscars, this ain’t.
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On the other hand, the NPC is closely watched by China-watchers, since it provides a further sense of the government’s direction. After a 2015 marked by slowing growth, market turmoil and the seeming ineffectiveness of Chinese officials to rectify either, this latest instalment wasn’t any exception.
Still, much of it’s rehash. This year’s headliner was Premier Li Keqiang, who delivered his Annual Work Report on Saturday. In it, he confirmed the government’s economic growth expectations and when again went within the main points of their “13th Five-Year Plan,” which covers 2016 to 2020.
China is still big on big plans, in case you hadn’t noticed, and delay pills work hard to get the most from them in terms of public play. The Communist Party’s powerful Central Committee released its “proposal on formulating” (as official communication named it) the 13th Five-Year Plan last November, and what Li spoke to in the NPC on the weekend was the “draft outline.” The NPC is the “supreme organ of state power in China,” since it’s website says, and one of their jobs would be to rubber-stamp the program.
Anyway, the most reported bit from the NPC this season was the GDP growth forecast, even though it merely confirmed the number that Xi unveiled last November: 6.5 percent annually for the following 5 years.
That, the federal government acknowledges, will be the slowest average development in over three decades (and lower than last year’s already-disappointing 6.9 per cent mark). However the Five-Year Plan’s all about meeting targets, and Beijing’s long-term target is to hit 92.7 trillion yuan (about $19 trillion, or 365 times Canada’s current GDP) by 2020. It pegs 2015 GDP at 67.7 trillion yuan, to reach 92.7 you’ll need a 6.5 per cent compound annual growth rate.
Do the mathematics – and presto!
Of course, achieving 6.5 percent growth is a lot harder than plugging numbers right into a CAGR calculator. And there is, of course, much skepticism about whether the official GDP numbers could be trusted anyway.
That 6.5 per cent mark continues to be above the International Monetary Fund’s projections of 6.3 percent in 2016 and 6 per cent in 2017, and well above what some analysts believe may be the real number.
But, will it even matter who is right about Chinese GDP?
In a means, yes, of course it does. Markets around the world interpret Chinese growth like a proxy for global economic activity and, more specifically, commodities demand. Too, whether China achieves its GDP forecasts is really a signal of if the government is effectively managing the economy.
In short, Chinese GDP is much more essential for what it is taken to mean than what it really means. Which is why investors must take it with some clear perspective.
For one thing, given that its growth projections have an uncanny knack for being achieved, we really should not be surprised if official GDP growth meets or exceeds the Five-Year Plan’s goals.
As well, 6.5 percent official growth might not seem bad or good in itself, however the number, given all the wiggle room around it, is probably best interpreted directionally instead of specifically.
Directionally, the federal government is clearly stating that it’s prepared to live with slower growth. Li put it in perspective within this speech, noting the economy has grown a lot that each percentage point of GDP today is the same as 1.5 percentage points five years ago and 2 percentage points a decade ago. Continuing to grow even at 6.5 per cent will be a “difficult battle,” Li said.
The Five-Year Plan as discussed by Li contains most of the familiar reforms to wage that war: urbanization, better infrastructure, energy conservation, poverty reduction and so on. But one word sticks out within the official communications: “innovation.”
The Plan calls for research and development spending to comprise 2.5 per cent of GDP by 2020, up from 2.1 percent in 2013 (according to the IMF). To compare purposes, R&D spending in Canada in 2013 only agreed to be 1.6 percent of GDP.
Again, the more knowledge about the numbers probably don’t matter around the directional signal: the federal government clearly sees innovation as vital to China’s economic transformation, and will undoubtedly devote resources to encourage it.
For investors, this might provide opportunity. According to McKinsey’s Erik Roth, Jeongmin Seong and Jonathan Woetzel in a recent report, China’s competitiveness record on innovation is “decidedly mixed,” however they highlight several places that the possibility seems high.
One is high-speed rail, that has benefited from years of government prioritizing and spending to drive engineering innovation. McKinsey estimates China already has more than 40 per cent of global railway equipment revenues, and also the Five-year Plan requires even more growth of China’s high-speed lines.
A single company – state-owned CRRC Corp. – controls a lot more than 90 per cent from the domestic rolling stock market, and it is an ever more international player. Plus, it trades on the Hong Kong exchange (HSE:1766), currently having a P/E of around 15.
The McKinsey report also highlights the potential for innovation in consumer products or services, leveraging China’s huge consumer base and Chinese companies’ ability to commercialize ideas quickly. It cites Alibaba (NYSE:BABA), Tencent (HKE:0700) and Baidu (Nasdaq:BIDU) as examples.
The point is, whether China realizes its five-year aspirations maybe shouldn’t matter much to investors. All they have to know is that the government is going to do everything it may to achieve them, and there will be winners and losers.
Investors may be best looking for those than betting on Beijing making its numbers.