Emerging Market FX: China’s Five Year Plan

Last week saw the conclusion of the Fifth Plenum of the Communist Party of China, where the party reviewed proposals for the thirteenth five year plan, essentially setting the stage for growth perspectives for 2016 through 2020. The summary of the salient points has been released with the detailed proposal to follow. The final draft of the detailed proposal will be made public at next years National Peoples Congress scheduled for March 2016.

The focus of this latest five year plan is based around the principal of achieving and securing ‘moderate prosperity’ by 2020, premised on moderately rapid growth, reduction of poverty, enhancing social welfare, catering to the environment and developing more mature governance structures.

Growth The Goal

Development is still the number one priority with the five-year plan proposals focused on maintaining ‘medium rapid’ growth; official estimates suggest that doubling the 2010 GDP by 2020 requires an average 6.5% annualized growth rate over the next five years. To assist in the attainment of these ambitious growth objectives the plan proposes promotion of innovation, an upgrade to the manufacturing sector, increasing research and development budgets, modernizing agriculture, and regional development programs while relying more on internet technologies. One of the main drives will be the support of entrepreneurial programs, business creation, registration, and development. The plan also identified the importance of deepening economic and fiscal reforms, intensifying targeted macro policy management while liberalizing goods and services in prices in competitive sectors. Another area of focus will be the promotion of the consumption contribution to the GDP with policies targeting employment and wage growth, the expansion of social welfare and enhancing the services sector, through the liberalization of pricing in an attempt to attract private sector investment

Green Growth

One of the areas of particular focus and development is ‘green’ policies, included for the first time in this thirteenth five year plan. With specific reference to committing to CO2 emission reduction of 40-45% by 2020. The plan also targets increases in non-fossil energy as a primary resource from 11.4% this year to 15% by 2020. The proposal highlights establishing distribution systems for the rights to use energy, resources and subsequent pollution and CO2 emissions, detailing plans for the implementation of prevention and clean up programs for water air and earth pollution. The most likely mechanism for delivering these plans will be through taxation coupled with incentives for environmental innovation programmes.

Poverty and Social Welfare

The latest five year plan is also concerned with equality, poverty reduction, and broader social welfare. The government is seeking to eliminate poverty by 2020, elevating the 70million members of the population who currently exist below the poverty line, existing on less than 1.9USD per day. One of the principle drives in this poverty reduction program will be a focus on education, offering free middle and high school and vocational education to students from poor backgrounds. The government will also seek to enhance the minimum wage system by improving social safety nets. The government will enhance the provision of pensions and critical illness insurance nationwide by 2020

Global Investment

The government intends to open further up the economy through this five-year plan. China is seeking to enhance its overseas investment programmes by developing international co-operation, one immediate aspect of this drive is the inclusion of the RMB in the IMF’s SDR (Special Drawing Rights) which would underpin the global recognition of the Asia Infrastructure Investment Bank, promoting China’s regional free trade agreements and establishing more free trade zones

One Becomes Two

After thirty-five years of enforcement, the ‘One Child’ policy is to be reversed. The government are to remove this restriction of one child per family and promote a two-child family policy nationwide. The prior policy of family planning has had a significant impact on the working-age population responsible for a faster-aging population and other social issues. The removal of the one child policy will likely be responsible for a growth spurt in the Chinese population; this growth will likely be responsible for an increase in childcare spending over the next five years. Even a small up tick in the family development would have a significant impact on China’s aging population problems.

Trade Idea

The technical pattern I am tracking in this pair continues to develop as anticipated. Monitoring the market for a decline towards 6.30/6.29 levels where I will be watching for reversal patterns to position on the long side, leaning against the prior double top at 6.28 targeting a mover back towards 6.39 overlap level. If price break out of the current corrective channel I will reassess the set up likely looking to buy a retest of channel resistance as a support level to enter against.

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Existing EMFX Trade Update:

Long USDINR 65.25 Stops To Entry, Target 68.80

You can access the the trade thesis and rational here

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