Premium: Overview of the 14th Five Year Plan
Plus some of my views on investable themes
Well, well, well. All it took was a few days of whiplash regulations followed by unprecedented draw-down to get folks interested in the Five Year Plan. (This thread also helped)
From the Mechanism of the Five Year Plan, we know that it's the Chinese government's wishful blueprint. It's a guidance document that's put together through rounds of discussions and buy-ins from provincial, municipal and state levels. Still, if any startup or large corporations release the OKRs, there's no guarantee they will all happen. The history of Chinese Five Year Plans (FYP) is littered with their failures as much as their successes. Goals that weren't accomplished in the prior period gets carried over and re-empathised. The actual groundwork is done by provincial and local governments who will translate these ambitious goals into local policies. To keep track of each theme’s progress, reading local governments’ policies is the safest bet.
This table summarises the high-level social and economic indicators in the 14th Five Year Plan.
My 2020 to 2025 Five Year Plan narrative is the period of the Great Reshuffle. Similar to how on-premise enterprise software that gets by on license sales eventually switch to the cloud and recurrent billings. From the outside, the firm will see a few years of flat or moderate growth, but internally, they are re-architecture the bones of the place, shift emphasis from one department to the next and spin up new cloud divisions that weren't there before. Theoretically, when the pivot is complete in a few years, they will be ready for more growth.1
Aspects that marked a departure from prior FYP (and therefore emblematic of a reshuffle):
The lack of a concrete GDP target while others do have concrete number targets - Unlike prior years, there wasn't a concrete GDP target. This is highly unusual for China who has historically prided itself on its GDP growth (though numbers here are not always concrete) and sends a strong signal that growth at all costs is not the main objective. Conversewisely, other indicators that traditionally did not have numerical targets attached to them now do, indicating higher focus in these areas. These include population growth, healthcare support and growth of high tech sectors.
35% of indicators are about social welfare, indicating a rebalancing toward social factors - It seems like increasing fertility rate and providing comprehensive healthcare options are new focus areas. I've tweeted about how I view the crackdown on education providers is primarily to do with its burden on child-rearing. I think keeping a sustainable demographic is currently the number one issue in policy member’s minds and expect more here.
Paying attention to the binding targets and those with the biggest target increases - Targets that are binding carry greater significance (and harsher penalties for nonattainment) than advisory targets. Environmental and security related issues are non-negotiable here while innovation and growth rates have all been advisory. The biggest expected increase in the indicators are in areas of patents, fertility rate and reduction in emissions, which are areas that I think will receive the strongest policy pushes.
Shifting of achieving GDP via service sector to GDP via high tech industries - One of the biggest differences in comparing the 13th FYP to the 14th FYP is the focus on GDP from core industries rather than the service sector. The FYP itself is littered with passages on upgrading manufacturing and creating domestic innovation. This coupled with the binding targets of security indicators indicates a deep desire to be increasingly self-sufficient in the coming years.
Given the difference in emphasis, I think China aims to reshuffle from an export-led, light manufacturing base that prioritises unequal growth2 to a consumption-led, high-tech manufacturing-based, low-carbon country (with sustainable fertility rate).
Selected key investment themes from the 14th Five Year Plan:
Dual circulation and a robust domestic market mean a focus on domestic FMCG - Hillhouse, Sequoia, Tencent have all been chasing noodle bars, dim sum places and milk tea this year. Not surprising, as in the aftermath of COVID-19 and government direction, a lot of focus will be on creating Chinese domestic brands to replace Western brands. Perfect Diary and Hey Tea are some early leaders, but there will be more. All the consumer tech investors have pivoted into consumer space investment this year - interesting startup names to watch3 are Neiwai, Buffx, Fiture, Manner coffee, Wonderlab and M Stand.
Cloud adoption for manufacturing industries - As I've written about in State of Chinese Cloud Part I, II and III, the industrial internet is set to be a big theme, especially now that it’s gained government backing. Digitalizing the supply chain and moving entire production ecosystems onto the cloud will be strong themes for a while. I do not think this will be done in the next five years but will be done in the next ten. Technology adoption on this scale for industries is hard, and I wouldn't be dissuaded with a lack of clear results in the short term. This is a central theme for the next few decades for China, and it's worth watching.
Moving out of private education and healthcare providers and anything that keeps real estate prices high - Education, healthcare and real estate-are known as the three mountains, as these are the highest buckets of expenditures for an ordinary Chinese family. I see many motions already to tackle education and housing costs, and assume healthcare will be next. The overarching aim will be to increase these services and asset's affordability to take up less of a family's disposable income, thus theoretically encouraging more children.
Innovative medicine and life science sector - This gets called out as a theme that fulfils both advanced technology as improving health outcomes for the population. I'm not an expert in life science, but I would start digging into what interesting pharma companies are coming up.
Green is good, but the renewable energy kind - In the next five years, I believe China’s future will be in sectors and companies that move China towards lower carbon emissions (electric cars, smart IoT grids, factory emission upgrades, etc). There've been many starts and stops with green tech in China before, but given the rally with electric vehicles last year4, I think it'll be more concrete this time.
Appendix:
I thought the HK Legislative Council Secretariat's summary of 14th FYP was decent.
Adhering to innovation-driven development: To consolidate and optimize the allocation of technological resources; to focus efforts on the research of original and pioneering technologies; to increase the share of basic research investment to 8% or above of the total R&D investment; to support the development of Beijing, Shanghai and the Guangdong-Hong Kong-Macao Greater Bay Area ("GBA") into international innovation and technology hubs; and to encourage enterprises to increase R&D investment and nurture high-calibre talents.
Accelerating the building of a modern industrial system: To promote a high degree of integration of advanced manufacturing and modern service industry; to build a modern industrial system through coordinated development of real economy, innovation and technology, modern finance and human resources; to promote strategic emerging industries; to further open up the service industry both internally and externally; and to coordinate the development of traditional and new infrastructure and build a modern energy system.
Forming a strong domestic market: To expand domestic demand and expedite the development of a more comprehensive domestic demand system, which should be integrated with the deepening of supply-side structural reforms; to use innovation-driven development and high-quality supply to guide and create new demand; and to accelerate the establishment of a new development paradigm featuring dual circulation which takes the domestic market as the mainstay while enabling domestic and foreign markets to boost each other.
Building "Digital China": To accelerate the construction of a digital economy, a digital society and a digital government, and to drive changes in production methods, lifestyles and governance methods through digital transformation as a whole.
Enhancing the quality of urbanization development: To facilitate a coordinated and characteristic development of large, medium and small cities and small towns by optimising the use of megalopolises and metropolitan areas to enable more people to enjoy better quality of life in cities.
Upgrading regional economic planning: To accelerate the coordinated development of the Beijing-Tianjin-Hebei Region, the development of the Yangtze River Economic Zone and the construction of the Guangdong-Hong Kong-Macao GBA, etc.; further "develop the west, revitalise the northeast, promote the rise of the central and speed up the development of the east"; to support faster development of certain special regions and strike a relative balance among the different regions in the development process.
Pursuing a higher level of opening-up: To further open up the country to the world, and promote international cooperation for mutual benefits by leveraging on its edge of having a super-large market; to ensure the steadfast and successful implementation of the initiative of jointly building the Belt and Road Initiative, and to promote the building of a community with a shared future for mankind (人類命運共同體)
Promoting green development: To improve the quality and stability of the ecosystem; to continuously improve atmospheric environment, make concerted efforts to promote reduction of pollution and carbon footprint, and constantly strive for better air quality and aquatic environment as well as effective monitoring and control against the risk of land contamination; and to speed up the green transformation of the mode of development, and make concerted efforts to promote high-quality economic development and a high level of protection of the ecological environment.
The key technology areas that got call-outs in the plan which are investable:
New Generation Artificial Intelligence
Quantum Information
Integrated Circuits (or Semiconductors)
Neuroscience and Brain-Inspired Research
Genetics and Biotechnology
Clinical Medicine & Health
New energy
Autonomous vehicles
High-end medical devices
Innovative medicines
Cloud computing
Big data
Internet of things
Industrial internet
Blockchain
Virtual and augmented reality
Further readings:
I'm not sure whether I've picked an even more obscure analogy to explain the initial idea, but I was a SaaS investor, and so everything looks like a nail
The more efficient form of growth unfortunately
They are hyped but can't vouch for unit economics
Tesla has raised the standard and supply chain capabilities for a generation of Chinese electric cars