Thursday, November 5, 2015

Impact of China's 5-yr plenum on its slowing economy will be worth keeping an eye out for

FXStreet (Mumbai) - The fifth plenum of the Chinese Communist Party (CCP) was held in Beijing from 26th to 29th October, in which the agenda for the next Five-Year Plan, set to roll in 2016, was decide. During the meeting, the government's main economic and development initiatives for were presented and discussed upon. China is in the midst of transforming into “lean, clean, and green” consumption-driven economy. The principle objective of the plenum was to draw up measures that would support China to graduate from a middle income status by 2020.

The need to strike a balance between growth and need to reform

The challenge that the policy makers faced was related to how they could strike a balance between the need for continued growth and the imperative for reforms. The struggle was to not waver on reform while still ensuring that it posted healthy numbers for all its economic indicators. China needs to go through a rebalancing phase without compromising on growth.

Current economic status paints a drab picture

China’s economy is currently in a far from comfortable position with its Q3 GDP slowing below 7 per cent as the economy certainly faces serious challenges. China’s PMI numbers are still below 50. Internal debts are on the rise while the currency is facing continued depreciation pressure, while investors have still not gotten over the implications of the stock-market intervention.

China is thus desperate to send signal to the markets that they are doing everything within their scope to cushion the slowdown of the economy.

What the Chinese 13FYP (Five Year Plan) has in store

China’s 13th FYP plans to shift the economy from an investment-driven one to consumption-oriented. If the model can be changed as pledged, China can comfortably move towards a balanced, inclusive and sustainable growth. With innovation as the core for national development, China might look to successfully implement ‘Made in China 2025 Plan’. The increased participation of China in global economy will not only ensure foreign investment in China but will also spell success of Chinese enterprises on the global platform. The plenum also marked an end to China’s one child policy.

Public services, providing more resources and support to disadvantaged households and groups, narrowing the income gap, and building a more fair and sustainable social safety net was also agreed upon to ensure equal income distribution. The "One Belt and One Road" strategy highlighted during the meeting can be expected to contribute significantly towards RMB internalization.

Beijing stands against persistent depreciation. The PBOC had cut interest rates and required rate of return (RRR) in August, to cushion the impact of devaluation. Beijing will continue to seek to globalize the renminbi, through currency swaps and trade-financing facilities.
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