China: Making solid progress on its Five-Year Plan

As the National People’s Congress convenes, we highlight three government priorities to watch.

Mar 8, 2017 | Invesco Asian Investment team

The annual National People’s Congress (NPC) started on 5 March 2017, with Premier Li Keqiang announcing key economic growth targets and major reform initiatives designed to help China achieve stable growth and become a “moderately prosperous” society by 2020. These announcements are in line with the vision that was laid down two years ago in China’s 13th Five-Year Plan.

China was largely on track with its policy targets in 2016. The economy grew 6.7% (as seen in the table below) while making progress in reducing industrial overcapacity and financial risks. 2017’s key economic targets are designed to build on that progress, with further fine-tuning in growth rates widely expected, to allow room for the Chinese government to proceed with reform issues such as overcapacity and leverage.

The table below compares the key targets announced this year and last year:

Key government policy targets 2017 Target1 2016 Target2 2016 Actual3
Real GDP growth % Around 6.5% 6.5% to 7% 6.7%
CPI growth % Around 3% Around 3% 2.0%
Fiscal deficit-to-GDP ratio % 3% of GDP 3% of GDP 3.8% of GDP
M2 growth % Around 12% Around 13% 11.3%
Registered urban unemployment rate % Less than 4.5% Less than 4.5%  


Three key priorities to watch in 2017

We believe this year’s NPC opening remarks painted a balanced picture between growth and reform. With the economy on solid footing, the government has room to deepen reforms to achieve further de-risking and social stability. Below are the key highlights, in our view, on the government’s priorities in 2017:

1. Addressing overcapacity — top priority

Addressing overcapacity remains a key focus, continuing from last year’s NPC meeting. As seen in Premier Li’s opening speech, the government plans to further reduce steel production capacity by around 50 million metric tons and shut down at least 150 million metric tons of coal production facilities.4 In fact, we have seen progress in supply-side reforms, with certain industries such as coal and steel already running ahead of their capacity reduction targets.

2. Reining in leverage

Premier Li mentioned that the government is on full alert to ease the buildup of financial risks, including risks related to nonperforming assets, bond defaults, shadow banking and internet financing. We are encouraged to see some NPC remarks being made on this front. We believe policy tightening in the financial industry is a long-term positive to rein in irrational credit growth. In our view, China’s current total debt level is not sustainable over the long term. However, we see the risk of a financial crisis as being low. The latest banking industry data released by the China Banking Regulatory Commission (CBRC) showed the banking sector faced no immediate stress; but over time, we expect the current stable nonperforming loan level of 1.7%5 might face upward pressure.

3. Reducing taxes to benefit private sector enterprises

While keeping the deficit-to-GDP ratio unchanged at 3%, the government aims to allow for further reductions in taxes and fees.5 While the deficit-to-GDP ratio stayed unchanged from last year, the government fiscal deficit volume is set at 2.38 trillion yuan (about US$345 billion).5 This implies a year-on-year increase of 200 billion yuan thanks to the continuous growth in GDP.1 We expect the private sector to be one of the major beneficiaries, as the government plans to expand the scope of income tax incentives for small micro-enterprises, and enhance the research and development tax deduction for small and medium enterprises from 50% to 75%.5 This helps promote social stability while working toward the goals of the 13th Five-Year Plan.

Conclusion: Making progress in building a ‘moderately prosperous’ society

Addressing overcapacity and debt-related issues, together with the potential tax reductions, are the government’s key areas of focus for 2017. Progress is already visible, especially on curbing overcapacity in key materials industries. The 2017 NPC will deepen the Chinese government’s efforts to build a “moderately prosperous” society, in our view. On the back of the government’s efforts, Chinese companies that show industry leadership and have strong competitive advantages will be the ones likely to succeed, in our view. As bottom-up investors, we believe investment opportunities in China are abundant, but it’s important to be selective.

1 Source: Xinhuanet, March 5, 2017.
2 Source: Citi Research, March 5, 2017.
3 Source: Deutsche Bank, WIND, March 5, 2017.
4 Sources: Deutsche Bank, Xinhuanet, March 5, 2017.
5 Source: China Banking Regulatory Commission, data for the fourth quarter of 2016.