Market watchers are set to focus on Beijing this week as China’s communist party elite convene for their fifth plenary session, a four day policy-setting meeting that is widely expected to chart the course for the country’s economic growth from 2016 through to 2020.
The plenum takes place against the backdrop of slowing economic growth and rising internal debt as well as stock market volatility. “China has challenges but the leadership seems to be well aware of the challenges. The recent financial volatility must not deter what needs to happen to build a sustainable China,” Liang Du, director and co-head of Asset Allocation at Prescient Investment Management, said via email.
At the same time, Matthew Birtch, a Strategic Management Lecturer at the University of Pretoria’s Gordon Institute of Business Science, said the meeting is very important as it is “Another stop on the path to greater economic growth for the economy”. But Martyn Davies, managing director of Emerging Markets and Africa at Deloitte Frontier Advisory, cautioned against reading too much into the discussions, “There’s an over-emphasis, outside China, on the importance of the plans… The world is looking to China for guidance and they need to set a positive tone,” he said.
Still, investors will pay particular attention to the country’s economic growth rate targets for the next five years. As part of its last five-year plan, China set out to deliver GDP growth of about 7% through to 2015. And even in the face of trying global economic conditions, the country’s official growth statistics have consistently come in around the 7% mark, which has raised some eyebrows. Speaking to Mineweb from Cape Town, Davies implied it is an open secret that the growth figures that China publishes are different to its actual growth figures. In terms of economics, Birtch said there are many issues with the way in which GDP is measured and that it is likely China reports a ‘ballpark figure’.
Should the country lower its growth target to below 7%, it will do so for the first time since the late 1970s. According to JP Morgan, China’s commitment to doubling GDP from 2010 to 2020 requires an annual growth rate of 6.5% over the next five years.
Commodity markets have already been riled over concerns of slowing growth in China, the world’s second largest economy and largest consumer of raw materials, so actual lower growth targets set by the country’s government are likely to further impact commodity prices.
“We expect commodity demand to remain challenged by China’s moves to rebalance away from construction/investment-driven growth and toward consumption growth. This has exposed serious overcapacity in the sector, particularly in early-cycle commodities – steel, cement and coal,” JP Morgan said in a note.
“Most people knew that this was a super-cycle and that it would end,” Birtch said by telephone. According to him, some commodity-based companies made huge judgement errors by putting all their emphasis and focus on China instead of hedging themselves outside the country. But he said commodity prices will pick up as China has merely hit a plateau in terms of infrastructure growth, “There’s still a huge amount of infrastructure that is needed and there are still huge rural populations that they want to urbanise”. He expects this infrastructure plateau to last for a minimum of 10 to 15 years.
Meanwhile Liang Du said the rebalancing of the economy will lead to the normalisation of the Chinese market and be more market driven. “Although growth may be temporarily slower, it will result in a far more sustainable future for China as a whole,” he said. Davies added that the size of China’s economy is far more important than the rate at which the country grows, saying we shouldn’t “sweat the decimal points.”