Investing in China in Next Five Years

China introduced its 14th Five-Year Plan at the fifth plenary session of the 19th Central Committee of the Communist Party of China which concluded on October 29.

The plenum and the latest five-year plan slipped under the radar for most Western media and this is unfortunate for investors trying to assess future opportunities in China.

This is not a Soviet-Style five-year plan of the type much derided in the West. This is a pragmatic but reliable guide to Chinese development priorities over the next five years. It points the way to investment opportunities and new business developments within the context of a longer vison of socialist modernity for 2035. Innovation is the key driver with priorities given to agriculture, rural development and modernization.

The Five-Year Plan sits beside a core dual circulation concept and understanding this relationship is important when it comes to evaluating investment opportunities. The dual circulation concept is designed to increase China’s economic independence by reducing its reliance of outside supply chains and markets. The policy foreshadows a reduced reliance on exports as a primary driver of economic growth.

More investment opportunities will come from more investing in domestic consumption than building factories designed to satisfy foreign consumption. This requires the continued expansion of Chinese capital markets and the continued growth of Shanghai as a world financial centre. Breaking the ties to a US dominated trade settlement system is central to achieving these objectives so foreign investors focus on the area most mentioned in the limited foreign media coverage – the Chinese sovereign digital currency or digital RMB.

In the future digital RMB will become a feature of large value cross border and trade settlement so it’s also a foundation of Belt and Road Initiatives. This will bring changes to logistics chains and the way counter-party trade risk is managed. Those who adapt to these changes will have a competitive advantage.

However, digital RMB is just one section of a broader focus that covers seven sub-areas. These are 5G infrastructure, ultra-high vacuum (UHV), inter-city high speed rail networks, renewable energy charging stations, big data centres, artificial Intelligence, Industry Internet of Things (IIoT).

Although investors will be inclined to focus on the innovation hubs in Shenzhen it is also wise to consider the innovation centres established within the new regional development architecture. These support China’s domestic economic circulation, industrial modernization and Eurasian components of the Belt and Road Initiative.

The Chengdu-Chongqing twin-city economic circle supports industrial and digital modernization. High speed rail networks deliver efficient logistics chains that enhance some industries and make other alternatives obsolete. Investors need to move quickly to identify business that will thrive and survive in the new environment.

These are important investment areas, but investors also need to be alert to the priorities listed in the longer vision.

The second industry area is agricultural security requiring an increase in agricultural efficiency and self-sufficiency. For investors this means a decrease of independence on foreign suppliers for agricultural products in China.

Instead the opportunities will come from agricultural development within China including the import of expertise and equipment. Later opportunities will emerge from the modernisation and growth of an agricultural commodity sector so that more closely resembles the logistics chains now seen in Australia, Canada and the United States.

Early identification of these agricultural conglomerates, the vertically integrated grain growing and distribution companies, and the aggerated broad acre farming companies will provide investors with a first mover advantage.

A third industry area includes environmental protection. This is difficult to isolate as a stand-alone area as it includes a focus on energy consumption, energy supply, energy technology and energy governance. These drive domestic changes, but the policy also encompasses international cooperation.

The industry area aims to achieve a 20 percent share of non-fossil energy in national energy consumption by 2030. This makes wind and solar power key growth industries. The expansion of these targets offers a concentration of investment opportunities particularly around a greater focus on water and soil pollution management. Investors will consider how foreign companies with this expertise can assist in achieving these targets.

The fourth area of interest to investors is meeting the demands imposed by an aged society. By 2022, China will become a deeply aged society with 14 percent of the total population aged 65 and over. A decade later China becomes a super-aged society with over 20 percent of the total population aged 65 and over. This same change in the age demographics took 28 years for France, and 36 years for Germany.

Some Western companies are well positioned to offer solutions in quality health care, support for the aged, and specific consumer products and services, all of which will see increased demand. These Western solutions must be balanced against higher Chinese expectations around care standards so Singapore companies in this space may have an advantage. Investors will watch for partnership opportunities that match Western experience with Chinese service delivery.

The fifth area of industry focus offers little for foreign investors because it deals with defence and defence related growth.  However, aerospace and aviation equipment development for China’s C919 passenger jets, autonomous technologies, and new materials have both military and civilian applications. This technology crossover is common in all economies so when approached with caution, a number of investment opportunities are available.

Investors must look beyond the simplistic mantra of Western politicians who constantly point to the growing middle class eager for Western products and expertise. This middle class is not a group to be exploited as a bottomless pit of foreign consumption. They aspire to develop an innovative, self sustaining society that avoids the divisive plutocracy plaguing Western societies.

Foreign investment under the 14th Five-Year Plan will assist China in reaching the goal of socialist modernity whilst avoiding the stagnation of middle-class aspirations. Investment opportunities come from assisting rather than exploiting those aspirations.

Daryl Guppy is an international financial technical analysis expert. He is a national board member of the Australia China Business Council.