China looks to stoke domestic spend

1st December 2010

An article on the Opalesque website highlights the opportunities it may present investors. There are,however, fears over inflationary trends in the country, as this article in The Australian points up.

The five-year plan, the 12th in the series, covers 2011 – 2015. Laura Luo, Schroders fund manager, Asian ex Japan equities, says the key themes of the plan are: 

• Rebalancing economic growth, in particular, stimulating consumption (relative to exports and investment)

• Adjusting the supply structure by upgrading traditional industries, developing new strategic industries, and promoting the service industry, clean energy and environmental protection

• Balancing regional growth by accelerating the development of inland areas, promoting regional integration, and fostering urbanisation in small- and medium-sized cities.

Enormous impact

Luo says the emphasis on "rebalancing" economic growth, with a shift from investment and export-led growth to a consumption-led model, is likely to have enormous impact on China's economy and equity markets going forward.

Luo notes that the 11th five-year plan also called for greater emphasis on consumption, but there has been little progress on the rebalancing of the economic growth model over the past five years. This is partially due to the massive fiscal spending package and, therefore, the surge in fixed-asset investment during the financial crisis.

Luo notes, however, that given the sluggish global economic outlook for the next few years, along with current levels of over-investment/over-capacity in China, significant and renewed effort must be made to rebalance the economy if China is to sustain its future growth: "The good news is that the government appears ready to address

this."

Social net spend

Two of the most policy measures aimed at supporting rebalancing are the raising of the household disposable income and reducing income disparity and building a better social security net.

Luo says: "These intentions mark a significant change for China, but they also intensify some of the concerns that already linger over the economy. Any income increase, for example, would lift labour costs and subsequently stoke the flames of inflation. The government therefore faces a significant challenge of managing inflation while working to close the income gap between urban and rural inhabitants."

If China does make progress towards achieving this rebalance, it is the broad consumption sectors that are likely to benefit most, in Luo's view. "These include the consumer staples and discretionary sectors, insurance/wealth

management services, healthcare, tourism and education, as well as the subsidised housing sector. "

Winners and losers

The losers are likely to be region's low-end exporters. With technology upgrades and the promotion of the service industry, clean energy and environmental protection also mentioned in the plan, Luo believes interesting investment opportunities are likely to emerge in markets including:

• alternative-energy plays (such as natural gas, wind-power and solar)

• hi-end capital goods manufacturers

• IT services

• and logistics companies.

On the energy front, Energy Efficiency News in this article highlights an Ernst & Young report which is also very positive on renewables investment in the country.

See also:

China warms to luxury goods

The Chinese Economy: Hart-break as bubble looks set to burst

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