China is transitioning. They are moving to an era of a service based economy. With that, their growth has slowed. Some economists are concerned, while others remind us the slowdown may just be a symptom of the overall change in structure. Either way, the economy became the key part in China’s latest five year plan.

The goals

What does China hope to achieve in the next few years?

First and foremost, they want to keep their economy growing. They prioritize doubling GDP from 2010 by 2020. With the economy slowing down, and the market largely volatile, they want to increase consumer spending to help bump up the economy.

The tools in the tool box

Usually China uses monetary policy, that is they manipulate interest rates and the money supply, in order to move the economy the way they want. Which they will do to some extent. They plan on lowering interest rates, to hopefully increase investing.

But this five year plan also wants to make use of fiscal policy as key part I’m repairing the economy. They hope with lower taxes, they can increase overall spending which will help stimulate the economy.

They will also be making use of subsidies to help finance key sectors and make improvements to infrastructure. They want to make improvements to the country, such as adding better power grids and charging stations for electric cars.

With a defined plan in place, investors have a sense of security, which may even help to stabilize the extreme volatility China has experienced over the past few months.

What does China mean for you?

Keeping China’s economy string is an essential part of the global economy. As the second largest economy in the world, China has the capacity to send shock waves throughout the world if their economy were to falter. We already saw how market volatility in China sparked massive volatility on Wall Street. Coupling this with the fact that emerging markets are struggling currently, if China’s economy slows too much, it could have the potential to push the global market towards another recession.

For now, China has its plan underway. They hope to continue growing. With lower interest rates and a fiscal policy to match, they should continue to expand. But we cannot ignore the potential China has. The size if it’s economy assured that whatever happens there will lead to ripple effects here.