China’s 14th Five-Year Plan, including their 2035 vision, is significant not just for investors but policymakers as well. Equally, outside of this grand plan, there are concerns around the currency and the risks tied to investing in renminbi (RMB) bonds. 
To my mind, there are four compelling components to consider:
1) Technology - China will accelerate its technological development efforts. Whilst the previous 15-year technology plan from 2005-2020 was designed to help China catch up with the rest of the world, the latest plan is designed to propel China as a world leader in technology.
2) The environment – China wants to make significant strides in environmental protection. President Xi Jinping surprised many when he announced at the UN General Assembly that steps would be taken immediately to realise the goal of becoming carbon neutral by 2060. This is of strategic importance for China in order to build so-called ‘soft power’. And that could increase significantly when the project is implemented, particularly since China is now responsible for around half of global CO2 emissions. Putting the environmental issue high on the agenda should also provide a solid foundation for China's relationship with Europe.
3) Domestic demand – For a large part of the past 20 years, China has focused on the “foreign/export circle”, that is, on exports to the world supported by the ecosystem of trading partners and suppliers. However, China intends to shift its focus to the development of domestic demand, focusing on import substitution and hence, self-sufficiency. Countries that have been hanging on to China’s coattails in the past may well start to see diminished demand for their goods and services.
4) Financial sector – Finally, China will continue to reform its financial sector to invite foreign investors to buy and hold Chinese assets. This of course a key element in providing overseas investors peace of mind when it comes to investing in China.
Currency flow
The Five-Year Plan seeks to introduce some powerful measures, all of which are significant to foreign investors. In a world of low or negative interest rates RMB bonds are already attracting high yields and record spreads compared to US dollar and euro bonds but some have cited the renminbi as a potential risk to returns.
This exposure to exchange rate risk is, of course, a factor when any foreign investor invests overseas, whether an investment is denominated in US dollar, euro or emerging market currencies. In the case of China, the renminbi is a solid currency and whilst it can react just like any other, the bottom line is that it should behave appropriately, as has been the case in the past few months.
The economic fundamentals are solid in China, and Beijing does not want do anything to unsettle the RMB. Rather, they want overseas investment in China, and to nurture the RMB to one day become a reserve currency. All in all, there are many more merits than demerits for the RMB.
One potential risk is a possible sell-off in Chinese bonds if the economy continues to recover. Yields in China are already slightly above the level they were before 2020 so I’m not of the view that there is much further upside risks to yields.
Equally, there could be a convertibility risk. What if there is a geopolitical event affecting China? Would debt servicing be suspended?
Aside from these potential risks, China looks poised for continued growth and whilst some, in my opinion, optimistic, analysts believe this could be 10 per cent in 2021, I’d be inclined to expect trend growth closer to around 5 per cent, drifting even lower in the out-years. China is not focused on headline growth. If anything, policies have been geared to temper some parts of the economy, such as the housing markets and infrastructure investments by the local governments. If growth does hit 10 per cent, however, Chinese yields are likely to continue to rise.
Positive trade winds
Aside from this, trade could provide further tailwinds for China. It’s not clear as yet what China’s relationship with the US will look like under a Joe Biden administration and whilst it could improve slightly, it will not return to what it was before the Donald Trump era. The world has changed in the past four years, and China has changed. Based on the same considerations, one could conclude that president Biden could be more sociable with China – and that US investors begin to look more to the opportunities presented by Chinese bonds.
Equally, the Asian free trade agreement (RCEP) recently signed between China and 14 other nations, which should be viewed as more symbolic than something that will bring enormous progress in free trade, could be significant. Indeed, many of the planned tariff cuts are already being discussed in the various countries and the signing of the regional trade agreement underpins the previously informal discussions.
There will likely be three key effects of this. First, the globalisation of trade should be over, at least in the unrestrained and unbalanced form it has taken over the past 20 years. In its place comes the "regionalisation of trade". The EU is one such example, where Germany has outsourced a lot to Eastern Europe and much less to China. The German production presence in China serves primarily to serve the Chinese market, not the European market. The situation is completely different in the US, where companies have outsourced to China in order to import back into the US. This is one reason trade with China has become such an important social and economic issue in the US, but less so in Europe. In its withdrawal from ‘Trade Globalization 1.0’, the US will likely bring more production back to North America, including Mexico.
Second, China will not allow itself to be isolated and it will likely shift its focus to "internal circulation" but not give up its export sector. Equally, I expect other Asian countries to be further tied into the Chinese ecosystem, which will make it nearly impossible for them to decouple from China.
Third, China will cut tariffs, which is good for the rest of the world. China is the most protectionist major economy in the world. With increasing prosperity, it has gained more confidence in opening up its economy by lowering import tariffs, which are still high compared to the tariffs of its trading partners. That’s good news for the world and will strengthen China’s position as a trading partner.
Stephen Li Jen is chief executive and co-chief investment officer of Eurizon SLJ Capital. The views expressed above are his own and should not be taken as investment advice.