China’s 13th Five Year Plan good news for investors
Government policy and regulations can have a major impact on local businesses that operate within a country and on foreign businesses that wish to invest and or do business in that country.
For China, a key development that has and will continue to have a significant impact on both in-bound and out-bound investments is the ratification of the 13th Five Year Plan (FYP) by the National People’s Congress in March 2016. According to Li Keqiang, China’s premier, the focus of this FYP was to address China’s “unbalanced, uncoordinated, and unsustainable growth” and to create a “moderately prosperous society in all respects”. This ‘moderate’ prosperity takes the form of a 6.5% average annual growth rate target, which when compared with other countries globally is still a high growth rate.
The 13th FYP hones in on five areas of development: innovation, coordination, green growth, opening up and inclusive development. A general theme across these areas of development is that the government will provide a high level of support for certain sectors that it views as underdeveloped in China while it will not provide as much support for other sectors.
These target sectors are set out in the 13th FYP and other government papers. For example, the Made in China 2025 Action Plan details 10 key sectors: new energy vehicles, next generation information technology, biotechnology, new materials, aerospace, ocean engineering and high tech slips, railway, robotics, power equipment and agricultural machinery. Similarly, 10 out of 25 of the binding targets in the 13th FYP relate to resolving China’s environmental problems by 2020. This signals that businesses which focus on improving the environment are likely to receive strong government interest and support.
The government has also pledged to loosen foreign investment restrictions in selected sectors, including, elder care, childcare centres, architecture, accounting, auditing, banking, insurance and securities. In November 2016, China Development Bank announced it will provide at least $44.8bn in financing to support the implementation of the Made in China 2025 Action Plan initiative during the 13th FYP period.
During the 13th FYP period, China also wants to develop its own global brands and increase its international prominence. To this end, the ‘openness’ development area is targeted at opening China to the world, partly by expanding exports and also by increasing outbound investment.
This is good news for companies that operate within these sectors; foreign companies that form joint ventures with Chinese companies are likely to obtain government funding and benefit from loosening of regulatory restrictions, Chinese companies are likely to receive government funding or at least minimal governmental hindrance when seeking to acquire foreign companies and assets and foreign investors investing in the targeted sectors are likely to see good returns on their investment. Indeed funds investing in China delivered the best returns to UK investors in the first half of 2017 according to the Financial Times.
The outlook created by the 13th FYP for China is therefore positive for Chinese companies considering outbound investment in general and also positive for inbound investment in specified sectors. This has led KPMG to conclude that there is potential “to usher in a golden age of inbound and outbound investment activity” in China. During the eighteen months that the 13th FYP has been in effect, the level of investment activity seems to support this conclusion. Outbound mergers and acquisitions made by Chinese companies amounted to $221bn in 2016 and $100bn in 2017 so far. As Ben Yearsley, director at UK based Shore Financial, put it succinctly: “where will you make money for the next decade? It’ll be Asia and China and the emerging markets.”
Ping He is an associate in the Corporate Team at international law firm Bryan Cave LLP.