Will China’s Next
‘Four Modernizations’
Bring Good Fortune?
February 2017
While China celebrates its Lunar New Year, the reform-minded President Xi 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, science and technology, defence and industry.
Neil Dwane
Global Strategist
Key takeaways
 President Xi 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 defence
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
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.
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 rooster-like 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
Will China’s Next ‘Four Modernizations’ Bring Good Fortune? | February 2017
Zhou Enlai to reform China in four key areas: agriculture, science and technology, defence and industry. Today, these same
economic lenses can show us where President Xi may focus China’s efforts in the coming years.
3
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.
1
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 United States – 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.
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.
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 ever-closer relationship with the Philippines could pave the way for the US
to withdraw its forces from those islands, which would help
China feel less boxed-in on its Pacific side.
2
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 fast-paced – 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
defence 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 health-care 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
higher-tech and R&D-intensive acquisitions – particularly
in the agriculture sector.
4
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 (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, low-value-added manufacturing.
Will China’s Next ‘Four Modernizations’ Bring Good Fortune? | February 2017
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 consumption-based 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 per cent of total global equity-market
capitalization. As China assumes a larger role in major global indices, it should play a larger role in investors’ portfolios.
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