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Investment Strategy Brief: China Is Not Looking Back

In its new five-year plan, China has ambitions to rival the U.S. and Europe in technological leadership. Investors should expect the country to stay assertive on the geopolitical stage.

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Brimming with confidence from a relatively fast pandemic recovery, China is pushing to become self-reliant and a rival to the U.S. and Europe in technology, according to its new five-year plan. The government is also sticking to its assertive stance on the geopolitical stage, and it aims to stay firmly in control of its private industry.

China’s new blueprint. Every five years, the National People’s Congress (China’s national legislature of 3,000 members) affirms its five-year plan that guides the country’s longer-term targets for economic growth, fiscal policy and political ambitions. Investors watch closely on how the plan will shape markets.

Technology front and center. China is ambitious, and nowhere more so than in technology. The government understands that, in a world where the U.S. and Europe see China as a strategic rival, China is vulnerable in relying on those regions for vital technology (such as the supply of microchips). In response, China plans to increase research and development funding by 7% annually in areas such as microchips, artificial intelligence and 5G, with the aim of not only becoming self-reliant but a global leader. Aligned with our One World, Two Systems five-year outlook theme, the ambitious goals confirm that the rivalry between the West and China will center on technology. Companies and countries hoping to straddle the middle ground must choose sides.

Flexible on economic growth, diverging on fiscal and monetary policy. China’s leadership clearly chose flexibility over clarity in foregoing a formal five-year economic growth target. For 2021, it announced a low-ball target of “at least” 6% real economic

Chart: China is Bouncing Back

growth. Given an average expectation amongst economists of roughly 8%, it seems the leadership wants to underpromise and overdeliver. What stood out even more was the clear divergence between China and the West on fiscal/monetary policy. In keeping its fiscal deficit target largely unchanged (around 3% of gross domestic product) and openly talking about monetary policy restraint, China is in a very different place than much of the rest of the world suffering economically from the pandemic. The country’s growth engine is working fine without the need for massive economic aid or ultra-easy monetary policy.

China will remain assertive politically. The plan reflects a country that is not looking back. Throughout the pandemic, it has been clear that China felt emboldened by its relatively successful management of the virus. Despite COVID-19 first emerging in China, it was able to keep the virus in check domestically and was even able to grow its economy in 2020. This attitude shone through in its increasing political influence in Hong Kong and the heavy-handed curtailment of some private-sector companies. This is unlikely to change going forward. In fact, China’s leadership is making clear it is the ultimate arbiter of what happens in private industry, prioritizing strategic goals over profitability and growth.

Market implications: near-term support, longer-term risks. In the short term, the five-year plan means China will be a driver of global growth and won’t rock the boat in terms of monetary and fiscal policy. The recent pressure on Chinese equities due to comments made by the central bank on financial excesses is unlikely to linger and we remain constructive on emerging market equities (China represents about 40% of the MSCI Emerging Markets Index). However, in the long term the government’s heavy hand in private industry is a risk to realizing its full potential, and the global competition in technology could result in lower profits.


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Wouter Sturkenboom, CFA

Chief Investment Strategist, EMEA and APAC
Wouter Sturkenboom, CFA, CAIA, is chief investment strategist for EMEA and APAC at Northern Trust. He is also a member of the Interest Rate Strategy Committee and Investment Policy Committee.