For most investors, China’s formal announcement of its 2016 economic and fiscal targets was a non-event, because officials had already released many key points publicly. In our view, however, the plan could be a game-changer.
The official unveiling came during the latest National People’s Congress (NPC). Held in Beijing in March, the NPC is widely seen as having symbolic, rather than real, value. Its agenda consists largely of ratifying decisions made by the National Congress of the Communist Party of China, held the previous November.
This year’s GDP growth target announced at the NPC by Premier Li Keqiang—a flexible range of 6.5% to 7.0%—was widely expected and caused little surprise.
The same was true of statements regarding expansionary fiscal policy and accommodative monetary policy, supply-side adjustments (such as tax cuts), reduction of overcapacity in established industries, and continuing structural reforms and economic rebalancing.
We think it would be unwise to treat the NPC or these pronouncements lightly—history suggests they can pack a stronger punch than many people expect.
Don’t Underestimate Xi—or His Plan
At the November 2012 party congress, for example, attention focused on the appointment of Xi Jinping as General Secretary of the Communist Party, a prelude to his becoming president the following year. The congress also announced a crackdown on corruption and a slowdown in infrastructure spending. True to form, these were ratified by the NPC the following March.
Few observers realized at the time how huge an impact these measures, announced as part of the 12th Five-Year Plan, would have on China or, indeed, the world.
As the measures took effect, the slide in commodity prices accelerated, hurting commodity-linked economies and currencies the most. The selloff cruelly exposed the structural weaknesses in the political and economic systems of a number of Latin American commodity-exporting countries. Even more dauntingly, global trade volume collapsed.
President Xi inherited the 12th Five-Year plan but the latest one, the 13th, is his. Given the focus and determination with which he has carried out the inherited plan, we think it’s vital that investors understand the policy implications and potential economic impact of Xi’s own road map.