It’s a road map to profits. It’s Hansel and Gretel bread crumbs. It’s a chance to read the tea leaves.
With all the turmoil in the China Small Cap world right now, let’s focus some attention on the longer term.
At some point all the issues will be resolved, and China equities will become the superstars of past years. From these valuations, it’s really a no brainer. It’s just a question of time.
So, when it’s time to pick up the pieces and dive back in, where should we look? Luckily for us we have a Google map, complete with our car nav audio instructions, on where to invest. It’s called the 12th Five Year Plan, and it was ratified by the National People’s Congress on March 14th 2011,
A Look Back
China’s move to an industrial nation started taking place in the 70’s. However, when you think about it, if this is the 12th five year plan, then there’s 55 years in the rear view mirror.
The first five year plan spanned 1953-57. For some reason, they skipped ’62-’66, and got on even 5 year increments from there. The 12th Five Year Plan covers 2011 to ’15.
The 1st Five Year plan was based on the Soviet economic model. During this period of time, 595 large to medium size projects were completed and put into production- 694 were targeted in the plan. The Soviet Union helped. It laid the foundation for industrial growth in China.
Out of the green shoots of China’s industrialization in the 50’s grew a new problem- agricultural production could not keep up with industrial production. Guess what- China has the same problem today, which has led to inflating food prices, and problem they can’t seem to get under control. That’s why one of the key features of the 12th Five Year plan is the modernization of their agricultural industry.
Highlights From The 12th Five Year Plan
The 12th Five year plan is focused on creating an environment for steady and sustainable growth, and addressing rising economic inequality.
I have read both favorable and unfavorable reviews of the plan. Many feel the plan, while widely expected to be focused on internal development, still remains too export driven.
It’s actually a rather modest plan, and it’s goals would appear to be easily attainable. Here’s some specifics:
- GDP growth from $39.9 Trillion in ’10 to $55.8 trillion in ’15.
- Service as a percentage of GDP: 51.5% up from 47.5%
- Urban income: $26 trillion, up from $19 trillion
- Rural income: $51.5 trillion, up from $47.5 trillion
- New Jobs: 51 million (’10) to 45 million (’15)
Most observers consider these goals fairly moderate, and wish the government were more focused on the “unleashing” of domestic consumption.
Here’s a list of specific goals spelled out in the plan:
- GDP Growth: 8%
- Income Growth: 7%
- 2.2% of GDP spent on R&D
- Keep population below 1.39 billion
- adjust and redistribute income gap
- firmly curb and excesses in housing prices
In either case, China has a history of obtaining its goals on the 5 year plans, and if so, China still represents one of the premier growth investment opportunities in the world.
I don’t want to go into too much detail, because frankly, it’s really kind of boring. For our purposes as investors, we want to focus on the industries the government will be prioritizing. These 5 year plans are considered blue prints for businesses.
There are 16 sections to the plan, and within each section are several subsections, so you can see how long this could go on. Let me focus on some of the highlights.
Article 10 focuses on the development of strategic new industries. Here are the specific groups:
Energy saving and environmental protection, Next gen IT, Biotech, Hi end equipment (planes, satellites, etc), New or Renewable energy (nuclear, wind, solar), New Materials (rather earth, nano tech), and new energy transportation (like electric cars).
In the energy section alone, there are specifics targets placed on coal, crude oil, nuclear, Renewable (Hydro, wind, solar), and importing oil and gas.
Section 12 is all about transportation infrastructure. Goals: 9,000 KM of new highways; 300 billion RMB on hi speed rails, 45,000 KM of new passenger rails, new coal rails from Shanxi to Inner Mongolia, six new ports for heavy materials, adding 10,000 new berths, and new Beijing airport along with 11 new regional airports.
On the housing front, the 12th 5 year plan calls for the construction of 36 million affordable apartments for low-income people.
The 12th 5 year plan was disappointing to many China devotees- the early indications on the plan set expectations it would focus on unlocking the enormous power of the largest emerging consumer class in the history of the world, and I still believe this is a sound growth area for at least the next decade.
Looking back at the 11th 5 year plan, it called for 7.5% GDP growth, 45 million new job creation, and discharge of major pollutants down 10%.
GDP growth over the last five years far eclipsed 7.5% to an average of 10.5%, and China beat its targets in nearly every other category.
Therefore, while the 5 year plans do serve as a guideline for business, the bar is set rather low on the targets, and easily attainable. We can assume the Chinese economy will under promise and over deliver.
Where To Invest
From reading the plan, I believe there will be several great investment themes in China stocks for the next 5 years.
There will still be major growth on the infrastructure front. Cement, steel, chemicals, construction- all of these sectors will continue to prosper in the next five years.
I also believe the modernization of agriculture will be a major theme for the next five years. Food costs are a major component of China’s inflation problem, and China is a net importer of food.
Farmers are the single largest group of people in China, but the rights they have to their land can be easily infringed on, thus discouraging investment, modernization, and expansion. I’ll be looking for opportunities in the agricultural sector as the China small caps start to come back. China has to encourage more food production to lower costs to consumers and curb inflation.
Despite the plan’s lack of focus on the emerging consumer class, I believe there will be fortunes made investing in companies who cater to China’s massive emerging consumer class.
In the past 10 years, the Chinese consumer class has grown 10 fold. 1% of the population could afford a Western life style- today’s its 10%. That’s over 200 million consumers- roughly the size of the US consumer population.
There’s still 90% to go. I’m not assuming all 1.1 billion people will become westernized by 2020, but if the number simply doubles, it’s still only 20% of the population.
Look for a new idea on Tuesday.
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