Mizuho Daily – Reflate & Roil and what to make of China’s 14th 5-Year Plan

Mizuho daily market insights by Vishnu Varathan, Head, Economics & Strategy, Asia & Oceania Treasury Department, Mizuho Bank, Ltd.,

Reflate & Roil

Markets cannot decide if UST yields are the horse or the carriage. Friday’s bumper US NFP squeezed yields higher (carriage pulled by economic optimism?), but equities were initially spooked by higher yields (horse denting equities?) seating 10Y UST yields near 1.6%.

The “carriage” aspect of reflation ostensibly overtook into late Fri session as Wall St staged a racy snap-back to end on solid positive territory (+1.6-2.0%) and futures remain buoyant. To some extent, Biden’s $1.9 trillion fiscal stimulus passing Senate over the weekend, with some haggling that requires a circle back to the House, setting the stage for fiscal stimulus to pass this week may be fanning the embers of reflation further this week.

But whether and where this is a sensual sizzle or a blistering burn is unclear. Perhaps both.

On one hand, fiscal stimulus optimism may reflate commodities yet on the other discomfort with excessive and abrupt pick-up in UST boind yields could roil some parts of EM.

Speaking of roil, after a surprisingly tight rein on supplies at OPEC+ lifted Brent to $68/bbl, Houthi rebels attacking Saudi oil facilities (albeit with no outage) inspired a jump above $70.

While NOK, AUD (Above 0.77) and CAD benefitted, USD’s safe-haven from the roil cannot be ignored. EUR has slipped to low-1.19, USD/JPY lifted close to mid-108 and USD/SGD above 1.34

What to Make of China’s 14th 5-Year Plan

At China’s 14th Five-Year plan (2021-2025), growth targets, or rather the lack thereof, stole the limelight. Specifically, the conspicuous absence of a growth target for 2021-2025, threw off straight-forward comparisons to the 13th Five-Year Plan which targeted 6.5% average growth. To be sure, if 2020’s 2.3% growth – a massive out-performance by global standards – was excluded, China managed to achieve its 13th Five-Year plan (6.5% average) growth target.

The question then is what to make of a lack of a tangible, numeric goal, which has been substituted by a flexible “reasonable interval  .. depending on circumstances” guidance.

First and foremost, it is not a lack of accountability or ambition evident in the details such as;

i)  R&D growth target of >7% (aiming for a higher share of GDP);

ii) increased share of digital economy;

iii) labour productivity growth greater than GDP, and;

iv) increasing urbanization rate from 60.5% to 65%.

All of which demonstrate the desire for higher quality growth. A point that is also reflected in the ambition to lift average years of education of the working population by 0.5 years to 11.3 years compared to 10.8 years in the 13th Five-Year Plan.

Second, omission of growth target signals that the NPC is neither hung up on, nor unduly boxed in by growth targets; instead focusing on strategic goals such as “dual circulation” to simultaneously re-balance growth, up-skill industries and secure supply-chains.

It is this strategic positioning, not fussing about GDP headlines, that Beijing deems necessary to counter US’ challenge to its technological, manufacturing and geo-political ambitions.

Third, a more all-rounded approach to the economic strength also comes through as innovation (R&D, patents, digitalisation), industrial efficiencies (labour productivity) and human capital/social well-being is complemented by unwavering “green” targets.

Finally, Beijing is probably also sending an unequivocal message to the provinces not to be distracted by shiny growth targets to the detriment of wider economic needs.

This is telling in the NPC ignoring additivity of provincial growth targets of no less than 7% and base effects setting up ~8.5% rebound to suggest “above 6%” as 2021 growth target.

Key to this is ensuring  asset market froth is kept in check while financial stability is secured by re-directing credit away from over-/old- capacity to high-tech/high-growth industries.

Credit Source: Mizuho Bank Ltd