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View from the Global Strategist
Will China's Next 'Four Modernizations' Bring
Good Fortune?
Neil Dwane | 24/02/2017
Summary
While China celebrates its Lunar New Year, the reform­minded President Xi Jinping is
likely polishing up his next Five Year Plan. Perhaps he will put his own twist on a
predecessor’s strategy and look to strengthen China in four key areas: agriculture,
industry, defence and science & technology.
Key takeaways
President Xi Jinping is determined to fashion a more modern, dynamic and economically prosperous China than his predecessors did.
China wants to transition away from agriculture, focus on innovation and retool its industrial capabilities – but its maritime expansion and increased defense spending
could raise tensions.
We view China as the big investment story of 2017; it is the biggest contributor to global growth and should continue playing a larger role in investors’ portfolios.
China’s Year of the Rooster officially began on 28 January 2017, and investors should be
happy to hear this proud creature crow out a new dawn – especially given China’s tough start
to the Year of the Monkey in 2016. Fortunately, determined policy makers at the time were able
to focus their efforts on continuing reforms and restoring economic growth, which boosted
commodities prices globally in the second half.
to the Year of the Monkey in 2016. Fortunately, determined policy makers at the time were able
to focus their efforts on continuing reforms and restoring economic growth, which boosted
commodities prices globally in the second half.
We believe President Xi Jinping will use 2017 to keep up his reform efforts and project stability
as he readies his Five Year Plan for the Communist Party congress in November – but we also
wouldn’t be surprised to see a little rooster­like showmanship on China’s "One Belt, One Road"
initiative and other prestige projects. President Xi, who is already the most powerful Chinese
leader for a generation, is determined to fashion a more modern, dynamic and economically
prosperous China than his predecessors did – albeit one that is still under party control.
Four Modernizations 2.0
In fact, Xi’s ambitions for the next five to 10 years could be called the “Four Modernizations 2.0,”
after the efforts of former Premier Zhou Enlai to reform China in four key areas: agriculture,
industry, defence and science and technology. Today, these same economic lenses can show
us where President Xi may focus China’s efforts in the coming years.
Agriculture
China’s agriculture industry is woefully undeveloped, and it still employs too many people
compared with more prosperous nations: China’s agriculture employment share has come down
significantly but is still around 30 per cent, compared with the US at 3 per cent. China must
continue moving along this path as it focuses on urbanization, industrialization and higher
consumption. Despite its significant economic progress over the last 25 years, China still suffers
from huge wealth inequality between its developed coastal provinces and its rural interior
regions. Improving water quality and reducing pollution should help China improve farming
productivity, and its recent acquisition of a farming chemicals and seeds giant could wring more
food from less land.
This strategic transition away from agriculture could also force China to substantially reform its
"hukou" system, which markedly limits the ability of China’s people to migrate to where the
economic opportunities lie. With noticeable differences in living standards and property prices,
China will need to share its future economic success with both urbanites and the rural hukou
citizens who have contributed to building the provincial economies.
Industry
China already has some of the world's most significant industrial capabilities, although it does
need to reduce its emphasis on past successes such as coal and steel. The country is rapidly
moving up the value chain with its expertise in robotics, automation and new technologies such
as electric vehicles and EV and hydrogen buses – which are underpinning its “One Belt, One
Road” plans. With strong franchises and more engineers being trained than the rest of the
world combined, China is seeking to leap several decades of industrial progress in a single
bound; along the way, China hopes it can rectify the enormous environmental damage it has
wrought over the last 25 years and become more of an innovator than a fast follower. The
corporate confidence of the BATs and new mobile­ computing technology from Chinese firms
should help form a base of accelerated consumption and services, which should help China
rebalance even further away from exports and cheap, low­value­added manufacturing.
Defence
China has always had a significant army defending the walls to its north, the deserts to its west
and the jungles to its south, but for several centuries it has not devoted enough attention to its
naval powers. China is now treating its air and sea defences more earnestly – fortifying
disputed island territories and expanding its aircraft carrier and submarine fleets – but this is
raising geopolitical temperatures in the South China Sea. Many nations – particularly the US –
are concerned about China’s maritime expansion, yet it is not without precedent. After the Civil
War, the US expanded its maritime boundaries from the Philippines to Bermuda, which went
relatively unremarked at the time, but which now helps China justify its efforts to reclaim its
former hegemony.
China’s geopolitical relationships with other nations could also change in other significant ways.
The diplomatic myopia of the new US president may enable China to pursue its current
geographical expansion undeterred, and to use its "One Belt, One Road" initiative to fill the
economic void left by the US. At the same time, an irrational North Korea could create the kind
of tension that might force China to respond to external pressures and change its approach to
controlling its sea routes. It is also possible that China’s ever­closer relationship with the
Philippines could pave the way for the US to withdraw its forces from those islands, which
would help China feel less boxed­in on its Pacific side.
Science and Technology
China became a great manufacturing economy in the last 25 years, but it has lagged somewhat
in innovation and in research and development (R&D). That is beginning to change, however,
as China breaks new ground with social media and the consumerization of its economy. China’s
BATs (Baidu, Alibaba and Tencent) are as fast­paced – although arguably not as innovative –
as Google, Amazon and Facebook, driving China toward greater economic integration within
the region with new financial services such as Alipay. China is also filing more patents than any
other nation, creating new global forces in telecommunications and technology, boosting
defense R&D and tackling new initiatives in space—although the gap between China and the
“best of the west” remains wide for now. Of course, China must invest more in its health­care
system and focus on building related skills, since the country still offers lower standards of
other nation, creating new global forces in telecommunications and technology, boosting
defense R&D and tackling new initiatives in space—although the gap between China and the
“best of the west” remains wide for now. Of course, China must invest more in its health­care
system and focus on building related skills, since the country still offers lower standards of
health care than many others. Nevertheless, Chinese companies are moving away from
commodity investments toward higher­tech and R&D­intensive acquisitions – particularly in the
agriculture sector.
Key considerations for investors
As we wrote late last year in our annual outlook, we see China as the big investment story of
2017, and our overall optimism continues as China enters the Year of the Rooster. Here are
some important factors for investors to keep in mind as they consider investing in this dynamic
region:
As China urbanizes rapidly, it may require fewer industrial commodities and more oil and softs,
which may shift the outlook for commodities.
With China rebalancing toward a consumption­based economy, and with reform movements
converging in India and Indonesia, this may be the dawn of a new consumer market with 4
billion people.
Valid concerns remain over China’s capital position, and President Trump presents a wild
card: His policies could hurt trade relations and China’s “One Belt, One Road” policy.
Overall, however, China is the biggest contributor to global growth and boasts 18% of global
stock market capitalization.
As China assumes a larger role in major global indices, it should play a larger role in
investors’ portfolios.
Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested.
Past performance is not indicative of future performance. Investments in commodities may be affected by overall market movements,
changes in interest rates, and other factors such as weather, disease, embargoes and international economic and political developments.
Investments in smaller companies may be more volatile and less liquid than investments in larger companies. Investments in emerging
markets may be more volatile than investments in more developed markets. Dividends are not guaranteed. Bonds are subject to interest
rate risk and the credit risk of the issuer. This is a marketing communication. It is for informational purposes only. This document does not
constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation
of an offer to buy any security.
The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at
the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the
data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication,
extraction or transmission of the contents, irrespective of the form, is not permitted.
This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore
investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules
and regulations.
This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment
adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors GmbH, an investment company in Germany,
authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors Asia Pacific Ltd., licensed by the
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116087
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Neil Dwane
Global Strategist
Neil Dwane is a portfolio manager and the Global Strategist with Allianz Global
Investors, which he joined in 2001. He coordinates and chairs the Global Policy
Committee, which formulates the firm’s house view, leads the firm’s bi­annual
Investment Forums and communicates the firm’s investment outlook through
articles and press appearances. Neil is a member of AllianzGI’s Equity

Neil Dwane
Global Strategist
Neil Dwane is a portfolio manager and the Global Strategist with Allianz Global
Investors, which he joined in 2001. He coordinates and chairs the Global Policy
Committee, which formulates the firm’s house view, leads the firm’s bi­annual
Investment Forums and communicates the firm’s investment outlook through
articles and press appearances. Neil is a member of AllianzGI’s Equity
Investment Management Group. He previously worked at JP Morgan
Investment Management as a UK and European specialist portfolio manager; at
Fleming Investment Management; and at Kleinwort Benson Investment
Management as an analyst and a fund manager. He has a B.A. in classics from
Durham University and is a member of the Institute of Chartered Accountants.

View details
View from the Global Strategist
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Is Trump’s ‘Red Meat’ the Right Long­Term Diet?
Neil Dwane | 27/02/2017
Summary
Within hours of assuming office, President Trump began issuing executive orders and
policy proposals to fulfil his campaign promises. But if Mr Trump really wants to “make
America great again”, is he addressing the long­term structural problems that sorely need
fixing?
Key takeaways
In the initial days of his presidency, Mr Trump appears focused on trade and immigration; other issues popular with his constituents are waiting in the wings.
Yet as in Europe and Japan, US policy needs a far­reaching overhaul, and it is unclear whether Mr Trump will enact the structural reforms needed to restore the
American dream.
Among the areas in need of strategic reform are the soaring costs of education and health care, unsustainable pension promises and ballooning entitlements.
American dream.
Among the areas in need of strategic reform are the soaring costs of education and health care, unsustainable pension promises and ballooning entitlements.
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