China’s new 5-year plan includes achieving ‘healthy’ growth with a focus on tech, innovation and the environment. Kim Parlee speaks with Haining Zha, Vice-President and Portfolio Manager, TD Asset Management, about what this could mean for global growth and investment opportunities.
Just to give you some background, what was recently released by the Chinese government is the 14th five year plan and the long term objectives through 2035. Usually in the past, there was always some growth target number in the document, but not this time. And the reason is very simple. After 20 years of super high growth, China realized that at this stage, the quality and sustainability of the growth is much more important than the quantity itself. An overemphasis on the quantity actually could lead to excessive debt growth, higher environmental cost, and also a lack of motivation to reform and innovate. That's why they want to water down the numerical target.
What does that mean in terms of what can you can measure? They talked about technology, innovation, being key drivers. They want to increase research and development as a percentage of GDP. Does this signal more investment in technology? And I'm going to make the leap here. Does this signify maybe more protectionism in the tech space as they try and build up their own technology?
Actually, there is one thing clear that China doesn't want any protectionism. It really depends on the action and stance of the U.S government. Technologically-speaking as China continues to grow, there will be huge demand for technology products. For example, their annual import of semiconductor products is well over two hundred billion dollars. If there is an artificial barrier for selling those products into China, then this will naturally create opportunities for Chinese domestic companies. In a free trading economy with very little government intervention, these kinds of opportunities can hardly exist because new entrants have to make heavy investments and the chances are their initial product will be lower quality. It is really protectionist policy that will create new opportunity for those companies. If you count it as a threat, yes, as a potential loss of revenue and a market share, that is a threat to the U.S tech companies and tech companies elsewhere.
What about the terminology they talk about being moderately developed country by 2035? They're already the second largest economy in the world. What is moderately developed mean in terms of things like GDP per capita and what do we use to measure that?
Right. If you read the document, the most direct hint about the growth target is probably the language that they expect that the GDP per capita will move up another big step by 2035. Again, it's very vague. What does it mean? Our reading is that the current Chinese GDP per capita is around 10,000 U.S dollars and the threshold for developed economies is roughly 30,000 U.S dollars. Realistically, we think another big step simply means by 2035, it will increase to 20,000 U.S dollar, which implies a 4.7% annual growth rate. It's lower than the past, but it's still much higher than the developed economies, which basically have a trend of growth between 1 and 2%
Is there anything that could derail that 4.7% growth in terms of the long term picture?
Right. There are actually three tail risks we are monitoring very closely. The first one would be the geopolitical risk. In the near term, Trump could do something very damaging to the U.S-China relationship before his term ends. For example, a few days ago he issued an executive order which will bar the U.S companies and individuals from investing in a list of Chinese companies. The executive order will be effective in January, so we will have to see if the order will still be valid under the new administration. For medium and long term, the future direction of the U.S-China relationship will be driven by the next U.S president. If Biden becomes the U.S president, we expect that he will still treat China as a strategic competitor. But on many other fronts, for example, trade tariffs or climate change, he will be a much more rational player and he could form actually a better working relationship with China. The second tail risk we are watching is the real estate market in China. You know, back in August, Chinese regulators issued a very stringent guideline aiming to reduce the leverage of real estate companies in China. They established clear red lines based on various fundamental metrics. According to our research, the number of companies, a majority of the real estate companies actually are still non-compliant. The total assets of those non-compliant companies actually amount to 20 trillion RMB, which means that next year we could see some pressure in the real estate investment, which could have a drag on the GDP growth. The third tail risk we are watching is, of course, the high debt level in China. The China's macro leverage is around 270% of GDP. The most vulnerable component is the corporate debt, non-financial corporate debt. In the last couple of weeks, we have been seeing that there is some default in the Chinese corporate credit market, so it is certainly a reflection of the debt issue. Moreover, it is also a signal sent by the government that they will actually reduce the implicit guarantee and the moral hazard and trying to let the market work.
Haining, we're going to have to leave it there.
It's always a pleasure.
Thanks for your insight.
Thanks for having me.