How to Invest in China’s 13th Five Year Plan

October 20, 2015, 12:30 A.M. ET

How Credit Suisse Plays China’s 13th Five Year Plan

By Shuli Ren

The world catches a cold when China sneezes, and when the Communist Party meets for their next five-year plan, well, equity strategists shuffle their portfolios to be exposed to the right policies.

Credit Suisse made substantial changes to their China A-share portfolio today, increasing their exposure to the 13th Five Year Plan (to be announced next week) to 62%. “The 13th Five Year Plan will be a hot topic of discussion for the next 15 months,” wrote strategist Li Chen.

Credit Suisse raised its weight in Consumer Discretionary to 20% from 14%. The bank deleted Gree Real Estate (600185-CN) and Huayu Automotive Systems (600741.China) and replaced with Changan Auto (200625.China), Wanda Cinema (002739.China) and Zhejiang Huace Film & TV (300133.China). China’s movie industry is growing very fast. See also my last weekend’s column “Why IMAX China Is a Hit “.

The bank also increased its weight in Healthcare to 12% from 8%, deleting Yunnan Baiyao (000538.China) and adding Hengrui Medicine (600276.China) and Shenzhen Salubris (002294.China). Information technology is another favorite, now with 14% weight from 6% previously. The bank added Luxshare (002475.China) and GoerTek (002241.China).

Meanwhile, Credit Suisse downgraded Financials and Industrials to Underweight.

Bloomberg had an interesting story today, saying that the Shenzhen-listed New Economy ChiNext and SME stocks are back in a bull market. “The Boom Is Back in China Stocks, Depending Where You Look“.

You can call this investor greed (which Bloomberg suggested), or investors having no faith in the Old Economy. Since 2010, China’s largest mutual funds have been Overweighting the ChiNext stocks and Underweighting the main boards. Check out this tweet for a graph.

See also Barron’s Asia colleague Isabella Zhong‘s column “How to Invest in China’s 13th Five Year Plan“.

Month-to-date, the Deutsche X-Trackers Harvest CSI 300 China A-shares Fund (ASHR) rose 10%, the Market Vectors China ChiNext ETF (CNXT) jumped 17.4%, the iShares China Large-Cap ETF (FXI) gained 11% and the iShares MSCI China ETF (MCHI) was up 10.7%.

http://blogs.barrons.com/asiastocks/2015/10/20/how-credit-suisse-plays-chinas-13th-five-year-plan/

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How to Invest in China’s 13th Five Year Plan

China’s next economic blueprint will favor infrastructure, clean energy and information technology.

By ISABELLA ZHONG

October 19, 2015

It’s only a week to go until the upper echelons of China’s political elite gather in Beijing to sketch out a vision for what the world’s most populous nation will look like in 2020 and the steps needed to pull off the transformation.

The pièce de résistance of the Communist Party of China’s fifth plenum, which is scheduled to take place between October 26 and October 29, is the drafting of the 13th Five Year Plan. The sprawling blueprint will set the direction for China’s economic and social development over the next five years, a crucial period as Beijing seeks to liberalize policy and to transition away from manufacturing and towards consumption as the main source of growth. Here are five policy areas – and stock plays – to keep an eye on.

The GDP growth target

Beijing aims to double the size of China’s real economy by 2020 compared to 2010 levels, a goal set in its 12th Five Year Plan. To meet the target, GDP growth will need to be maintained at a minimum 6.5% average annual pace over the next five years, assuming China is able to rack up 7% growth this year, notes BofA Merrill Lynch’s head of China equity strategy David Cui. The strategist expects a 6.5% GDP growth target in the next five year plan, which compares to the 7% target in the current five year plan. If the target lands below 6.5%, “the market may view it negatively, fearing a lack of stimulus,” which would especially weigh on commodities, argues Cui.

China’s slowing economy has been the bogeyman of commodities, as well as stocks, in recent months, on fears of decelerating growth and elevated levels of corporate debt. Data released on Monday showed growth in the September quarter was 6.9% higher than the same time last year, the slowest pace since 2009. China’s economy has expanded almost 14 times over the past two decades thanks to a boom in exports and fixed asset investment, but growth has tapered off over the past five years as Beijing attempts to rebalance the economy towards a more sustainable, albeit slower growing, consumption-driven one.

There is some talk Beijing may scrap growth targets altogether, but Cui doubts it would be feasible given “all departments need a growth number to plan and coordinate their activities.”

New Areas of Stimulus Spending

Beijing has been cranking up stimulus to help soften the impact of slower growth. Besides aggressive monetary easing, fiscal spending has also ramped up, rising 26% in August compared to a year ago. Sectors benefiting from increased spending include education, healthcare and environmental protection. Public welfare is expected to remain high on the list as a target area for stimulus spending in the 13th Five Year Plan, which has “higher quality, efficiency, equality and sustainability” as its central theme. Besides public welfare, BofA Merrill Lynch’s Cui expects the plan to also highlight infrastructure development – such as urban subway systems, inter-city transportation and charging stations for electric vehicles – and defense.

A stock poised to benefit from higher infrastructure spending is Zhuzhou CSR Times Electric ( 3988.HK ), which makes components for high speed trains and urban transit systems. Another is telecommunications infrastructure company ZTE Corporation ( 763.HK ), which could benefit from the construction of electric vehicle charging stations. China Reform Holding recently invested CNY10 billion into the newly minted China TowerCo, which houses the infrastructure assets of China’s big three telcos, to develop electric vehicle charging facilities. Nomura analyst Leping Huang says the combination of charging stations with towers makes sense as China has seven times as many ground telecom towers as gasoline stations.

Favored Sectors

Beijing likes to dish out policy support, such as fast-tracked project approval, tax relief, subsidies and priority access to financing, to sectors it singles out for development. So which sectors are likely to be favored over the next five years?

BofA Merrill Lynch’s Cui expects the next five year plan to focus on three areas: Internet-plus, the services sector, and strategic industries that include new energy, biotechnology, environmental protection and new generation information technology. Both Internet plus, which uses the Internet to boost the productivity of traditional sectors such as manufacturing, and the list of strategic industries are vital to the government’s ambition to move China’s economy up the value chain, a key element in delivering higher quality growth.

Kingdee International Software Group ( 268.HK ) is a good play on the embrace of digital technology by China’s companies. The stock is China’s second largest vendor of data management software for business and the market leader for cloud-based enterprise resource management software. Shares trade at 27 times forward 12-month earnings against annual growth expectations of 35% over the next three years. Another stock to consider is Hollysys Automation Technologies ( HOLI ). The company produces both industrial automation and railway signaling equipment, which makes it a play on both Chinese companies migrating up the value chain and infrastructure spending by Beijing.

Environmental Protection

Two decades of manufacturing fueled growth has left China with a nasty pollution problem. Cleaning up the air and waterways has been high on Beijing’s list of priorities in recent years and is expected to be a focus area in the next five year plan. Measures in the new plan could be more ambitious than in previous years, notes BofA Merrill Lynch’s Cui. “Pollution is fast emerging as a constraint on China’s economic growth,” writes the strategist. An environmental tax is likely to be imposed over the next few years to help cut carbon emissions in half by 2030.

While that would hurt heavy emitters like the steel, cement and paper industries, it would be a boon for new energy companies like solar panel and wind turbine makers. Among solar panel companies, JinkoSolar ( JKS ) stands out with its lean production costs and high exposure to China.

Another environmental protection stock that Barron’s Asia has written favorably on is China Everbright International (257.HK), which is in the business of treating waste water and solid waste and is part of state-owned conglomerate China Everbright Group.

The Chinese yuan exchange rate

Since the yuan’s surprise devaluation in August, the market has been mesmerized with where the Chinese currency is heading next. The 13th five year plan could shed some light. “We expect the government to state that it will allow market forces to play a more important role in setting the yuan exchange rate in the 13th five year plan,” notes BofA Merrill Lynch’s Cui. That could put pressure on the yuan as funds flow out of the currency in anticipation of further weakening.

A falling currency is bad news for Chinese companies carrying large licks of U.S. dollar denominated debt. It would mean steeper interest expenses and repayment obligations in yuan terms. Companies with the highest levels of dollar debt include China Southern Airlines ( 1055.HK ), China Eastern Airlines and China COSCO Holdings ( 1919.HK ). Both airline stocks plunged following the yuan’s August 11 devaluation, while COSCO has been in a trading halt since August 7 amid a restructuring of Chinese state-owned shipping companies. on the other hand, Chinese companies earning the highest proportion of revenues in U.S. dollars include AAC Technologies ( 2018.HK ), Shenzhen Fenda Technology (002681.CN) and Shenzhen Kaifa Technology (000021.CN), according to numbers from Goldman Sachs strategist Kinger Lau.

For the views of four market experts on the yuan exchange rate’s trajectory, check out the recent Barron’s Asia Roundtable.

http://www.barrons.com/articles/how-to-invest-in-chinas-13th-five-year-plan-1445218483

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February 12, 2015

Understanding China’s 13th Five-Year Plan

By Owen Haacke

China’s policymakers are starting to reveal details about the direction of the country’s next Five-Year Plan (FYP), the central government blueprint for China’s long-term social and economic policies. While the 13th FYP (2016-2020) is still in the early planning stage, sources say it will focus on boosting economic development during a period of slowing economic growth. Though little is known about the new plan, foreign companies in China are already thinking through ways to engage policymakers during the planning process and set investment priorities. The US-China Business Council (USCBC) explores some common questions about the 13th FYP for companies that are interested in participating in the planning process (USCBC is the publisher of China Business Review).

What is a Five-Year Plan?

Five-Year Plans are social and economic development blueprints that were adopted in China in 1953 and modeled after the Soviet central planning process. The plans are drafted and implemented by central, provincial, local, and district governments, along with industry regulators—each often has their own FYP. The central FYP is drafted by the National Development and Reform Commission (NDRC) and lays out specific economic targets like GDP growth rates and social development goals in areas such as healthcare and education. Targets are established in consultation with experts from academia, industry, and other government ministries. The targets guide Chinese regulators throughout the five-year implementation period of the plan.

What is the timeline for developing the 13th Five-Year Plan?

Official discussion of the 13th FYP began in April 2013, and is expected to continue until the delivery of an initial draft in October 2015. That is when the NDRC typically begins drafting the plan, based on stakeholder input and public comment. To date, NDRC and other official source have remained relatively quiet about planning, and official updates have been posted on an official planning website. Public participation has been limited, aside from setting up a channel to solicit public comments for the 13th FYP on WeChat—a popular social networking platform in China. A finalized plan is expected to be approved at the National People’s Congress meetings in March 2016. The plan is typically released to the public shortly after.

Do Five-Year Plans still matter?

In general, FYPs are important in illustrating government priorities and setting a direction for policies. According to publically available data and a mid-term review of progress on the current 12th FYP, China is on track to meet the majority of its social and economic goals set through the end of 2015. Targets already or likely to be achieved include maintaining an average GDP growth rate of 7 percent, increasing services share of GDP by 4 percentage points, raising urban and rural incomes by an annual average of 7 percent, increasing urbanization by 4 percentage points, among a number of other economic targets. However, according to a mid-term review conducted in 2013, China is behind on targets to raise non-fossil energy as a percentage of primary energy, energy efficiency, and carbon reduction targets. With less than one year to achieve targets set in the plan and faced with moderating economic growth, some agencies, such as the Ministry of Environmental Protection. Based on past experience, a detailed official assessment of the implementation of the 12th FYP may be released at the end of Q3 or in Q4 2015.

What does this mean for foreign companies?

Actionable government targets and priorities in the central FYP and corresponding local and industry plans have the potential to shape—or dramatically change—the business models for foreign companies in China. Broad economic growth targets and initiatives in the plan have an impact on the overall business environment, while local and industry plans can drive the direction of government support and future growth.

What will the next five-year plan focus on?

The NDRC has released little about the content of the 13th FYP, but some government officials have already made statements about the plan. Continued economic development, with an emphasis on reform and innovation, will be the top priority of the 13th FYP, according to Premier Li Keqiang. Another area of focus, says Li, will be addressing “deep-seated” problems—which could refer to the ongoing anti-corruption campaign.

Meanwhile, a January 12 editorial by former NDRC head and current Director of the National Energy Administration Zhang Guobao indicates that the 13th FYP will focus on one key challenge: continuing China’s economic growth at a relatively fast past and maintaining “healthy development.” Zhang said that ambitious reforms laid out in November 2013’s third plenum will also be reflected in the plan, which seeks to double average annual  incomes by 2020 from 2010 levels. Experts say these goals should be attainable if China continues to grow at a steady rate of 7 percent, and others note meeting the goals would be challenging that any growth target under 6.5 percent, suggesting the central government set an average annual GDP growth target of 6.8 percent in the 13th FYP. Other areas of focus Zhang suggests will be carried over from the current FYP include growing domestic demand, upgrading industrial infrastructure, and reforming the country’s energy pricing structure.

It is likely that China will continue to expand central government debt to support emerging industries, according to Zhang’s editorial. He argues that China should continue to adopt a liberal monetary policy and invest in areas such as healthcare, elder care, and education, despite the piling up of government debt. Zhang also says that China should continue to invest in the manufacturing sector, even as it tries to bolster the country’s growing services sector.

What about local plans?

Local governments are also in the process of planning for respective local FYPs to correspond with the central government plan. Local government plans, while often rolling out later than their central counterpart, often have more specific economic targets and goals that impact the local business environment and incentive programs.

Many local governments have different processes and timelines for putting together their respective FYPs. While local development reform commissions (DRC)—government-sponsored think tanks for local leadership—have already entered the official drafting process in cities like Shenzhen, in cities such as Shanghai, they will not start until March. In Guangzhou, DRC officials began collecting public comments in September 2014, a process that will continue through September 2015.

District governments also base planning on a five-year structure. In Shanghai, for example, different districts have different planning processes. Shanghai’s Huangpu District, which is home for a number of multinational companies, is soliciting public comments through its official website.

What about industry-specific plans?

While information is limited at this time, the Chinese government works closely with regulators to draft a number of industry-specific FYPs in fields like financial services, environmental protection, and chemical industry development. These plans can have very detailed goals and are often circulated one month to one year after the release of the central plan.

How can foreign companies engage in the planning process?

As foreign companies engage with policymakers drafting central and local plans, they should note the following:

Engaging directly with the drafters of the main 13th FYP within the Planning Department of the National Development and Reform Commission is very difficult, but local and industry specific regulators are often more open to industry feedback to help ensure the quality of their plan. A number of USCBC member companies are working with industry regulators such as the Ministry of Industry and Information Technology, the National Energy Administration, and other agencies to find out more on their plans for drafting sector specific FYPs and how companies can support the research and drafting process.

Some USCBC member companies are also engaging with influential think tanks or agencies like the State Council’s Development Research Center, the Chinese Academy of Social Sciences, or the Central Party School to learn more about general principles associated with the 13th FYP and discuss how company goals might aid China’s future development. While these interlocutors may not be involved directly in the drafting, they are well-respected institutions that may be consulted for perspective on broader strategic planning. In addition, they might have further insights on avenues companies might use to effectively participate in the development process of the 13th FYP.

http://www.chinabusinessreview.com/category/government-politics/