3 Themes That May Do Well Under China’s New Economic Plan

Ho Khinwai
Ho Khinwai

It was March 22 of 2018, when US President Donald Trump first approved immediate tariffs on imported goods from China.

In early July the same year, China countered with its own tariffs on over 500 American-produced products – officially marking the beginning of the US-China trade war that has plagued our media ever since.

To us at Dr Wealth, the prominence of the US-China trade war had not only suggested rising tensions between both countries…

…but the fact that China has grown to become a global superpower on par with the US.

In fact, over the last 2 decades China’s economy has been exponentially evolving to become the 2nd largest economy in the world.

Reasons for progress are aplenty, but arguably a large part had to do with implementation of Five-Year Plans aka. FYP (五年计划).

A concept adopted from and supported by Soviet Russia, the first FYP started in 1953 and outlined the industrialization of China. While the Chinese government encountered multiple pitfalls and failures over the early Plans, by the 5th or 6th plan problems had been resolved and China’s economy was on a stable path for growth.

With 2020 being the final year of the 13th FYP, proposals for the 14th Plan (十四五) are currently being drawn up. It is expected for approval by end of this year and implemented around March 2021.

What may be interesting for investors looking for opportunities in China is to find “themes” and identify listed companies surrounding those themes that may do well from the implementation of the next plan.

This is generally because once themes are identified, the industries around those themes receive government subsidies, lower taxes, and cheaper or easier loans so that they collectively work towards hitting the Plan’s targets.

The following are some themes we believe are more “probable” to get passed in the 14th Plan.

**Just a caveat – while FYPs are largely followed and often successful, that does not guarantee that companies within specified themes will 100% do well. While research has been sparse on this, this “thematic” investing style may spark your interest to do more due diligence.

Theme #1: Sustainable Energy and Environmental Protection

China’s been increasingly prioritizing environmental protection and greening since the 10th FYP in 2001… so we know this will continue to be a priority for the Chinese government.

In the 13th FYP, we continued to see targets for lowering energy consumption, emissions, and more notably, the development of clean energy industries.

Furthermore, according to the government’s Made in 2025 strategy targets, China is expected to produce 80% of new and renewable energy equipment (ie. photovoltaic PV cells or panels) by 2025.

More recently, we’ve heard commitments by China to peak carbon emissions by 2030 and to achieve carbon neutrality by 2060.

Knowing these, we can expect to see China’s coal industry continue to decline while alternative energy sources (ie. nuclear energy, hyrdopower, solar) comprising more of the energy mix.

New energy companies like China Yangtze Power (SSE:600900), which operates the Three Gorges Dam and is the largest globally-listed hydropower company, have already done very well.

Another stellar example is LONGi Green Energy (SSE:601012), which has been a solid 2-bagger (rising more than 200%) until 2019. In the recent few months, LONGi has soared exponentially after China renewed vows to further develop its clean energy industries.

LONGi makes silicon modules as well as PV equipment, and is the world’s largest solar company by market capitalization.

Electric Vehicles (EVs) also have been a hot topic in recent years – with China’s commitment to producing 80% of new energy vehicles by 2025 under its Made in China strategy.

This should boost EV companies like BYD Auto (SZSE:002594) as new energy vehicle growth is expected to grow more than 25% CAGR from 2020 to 2025.

Additionally, companies on the periphery (ie. companies dealing with environmental protection technologies or monitoring) should also continue to fare well. For instance, China Everbright International (SEHK:257), a subsidiary under conglomerate Everbright Group, deals with all facets of environmental monitoring and treatment – including regional waste-to-energy projects and wastewater treatment.

Theme #2: Digitalization and Innovation

The continued success of Chinese tech companies and increased debates over tech and economic “decoupling” from the States point to a clear signal that technology and innovation will continue to have a special importance in the upcoming 14th FYP.

Particularly, economists and analysts expect to see targets for emerging technologies such as 5G, Artificial Intelligence (AI) and Internet of Things (IoT).

This is also supported by the government’s Made in 2025 strategy launched in 2015 – where it singled out next-generation IT, automated tools and robotics, high-tech vessel manufacturing, advanced devices and equipment for rail, agricultural and biopharmaceuticals.

More recently this month, the Chinese Ministry of Science and Technology (MOST) revealed that China will include “quantum technology” in its development of new high-tech industries.

Hence, we expect companies like iFlytek (SZSE:002230) and Baidu (NASDAQ:BIDU) to be key beneficiaries of this tailwind.

iFlytek offers a popular speech recognition mobile software – riding on a growing voice control consumer trend in China and a result of intensive artificial intelligence R&D efforts.

Baidu, similarly, focuses on AI and has been the #4 largest patent owner globally for machine learning and AI since 2010.

Peripheral companies should also do well – including China’s leading cell tower operator China Tower (SEHK:788), data centers like GDS Holdings (NASDAQ:GDS), and robotics and precision machinery manufacturers such as Estun Automation (SZSE:002747).

Theme #3: Import Substitution / Localization

Amidst US hostility and growing anti-Chinese sentiment, China is even more so looking inward for growth.

It is widely believed that the Chinese government will operate a “Dual Circulation” development pattern – prioritizing domestic demand while still keeping imports and exports at a stable level.

The emphasis will be on strengthening businesses supporting domestic consumption – making them more resilient and the preferred choice in quality and price over similar overseas goods.

This is especially significant for industries like medical and semiconductors – which rely relatively heavily on overseas imports which presently have some advantages over Chinese firms.

According to various reports, China’s 14th FYP will likely include a plan for self-sufficiency in IC foundry production – and supply is projected to expand by 40% from the 13th FYP target.

No doubt, one of the key beneficiaries will be SMIC (SEHK:981), China’s largest integrated circuit (IC) fabrication firm.

Shenzhen Mindray Bio-Medical (SZSE:300760) could also be another one of the beneficiaries – being one of the largest global medical equipment manufacturers with the quality of its diagnostic products meeting or surpassing international standards.

A Pivot Point for the Next 5 Years

With China expected to surpass US in economic growth over the next few years or decades, the Five-Year Plans (FYP) lay out a roadmap to where and how the Chinese government plans to achieve this growth.

More so for the coming 14th FYP – amidst increased Chinese tensions with US, Europe and India, and amidst lower global growth in this post-COVID environment.

While it is no guarantee that owning companies within targeted industries will perform well – if you are looking for opportunities in China… following these themes may be a great starting point!