CHINA is facing increasing economic challenges both at home and overseas compared with five years ago.

The global recovery seems to be fading, import intensity of global growth has declined, and volatility in global financial markets has risen as different major central banks are trying to navigate unchartered waters in different ways.

Domestically, China’s excess capacity and excess leverage issues have not improved, while property adjustments are still ongoing. Moreover, demographic aging will gather pace in the next five years.

Growth is still a top priority. While acknowledging the increasing difficulties of maintaining rapid growth, China’s government sees the doubling of 2010 GDP by 2020 to achieve “moderately prosperous economy” as its most important economic objective. As a result, the government has set a still ambitious 6.5 percent minimum per annum growth target in the 13th Five-Year (2016-20) Plan.

To achieve this, the government will push forward “supply-side” structural reforms to unleash new sources of growth. In addition, the 13th Five-Year Plan broadened the concept of development, placing more emphasis on social aspects, a trend that was started in the previous five years but has been made more prominent in this one: the Plan added new development targets specifically to promote “people-centred” urbanization, spanning from urbanization ratio, social welfare, air and water quality, to resource and energy sectors.

Given the ambitious growth targets for the next five years, measures used should lead not only to capital deepening but also enhancement of human capital, increasing total factor productivity by fostering innovation and reforms, and using traditional “industrial policies” to increase supply in non-excess capacity areas where demand exists.

The most difficult part of China’s supply-side reform is excess capacity reduction and more far-reaching structural reforms. Given the political and economic concerns raised earlier, we think the pace of State-Owned Enterprise (SOE) reform and capacity adjustment this year will likely be gradual. In the medium term, capacity adjustments may impose a modest but sustained drag on industrial growth. On the financial front, the greatest development potential will be in equity and bond financing, but progress in ongoing registration-based initial public offering (IPO) reform may be slow. Fiscal reform will be more challenging with the legislation and implementation of the proposed property tax reform.

Compared with the SOE reform plans already announced last year, the Plan offered neither new measures nor more details. Progress in SOE reform will likely be gradual in the next couple of years, given government concerns not only about the potential near-term hit to growth or employment but also any potential loss of state-assets.

The government has announced plans to reduce the capacity of China’s steel and coal sectors by over 10 percent in the next 3-5 years. However, the government wants to use more mergers and acquisitions as well as restructuring rather than closures and bankruptcy to minimize any subsequent negative impact.

Such a slow pace of capacity adjustment means that we will likely continue to see modest but sustained downward pressures upon Chinese industrial growth over the next five years, without any visible fundamental improvement of those sectors in the short-term. Related to this, neither do we think that China will likely see outright deleveraging in the next five year period. In addition, the slow pace of structural reform and credit-fuelled growth means that China’s debt/GDP ratio will likely exceed 300 percent before 2020, up from 260 percent in 2015.

The government also plans to push for further financial reforms, in particular via enhanced supervisions and capital market development. Specific planned actions include more private banks, “steady and gradual” push for consolidation of financial institutions’ businesses, and more progress on registration-based IPO scheme. The actual pace may be slowed by concerns of equity market performance. Thus the authorities should develop high-yield bonds and equity-debt integrated financing, as well as revamp China’s financial supervision framework to improve coordination and accommodate a more liberalized financial system.

The fiscal reform will be more challenging. Building on the initial progress made in budgetary reform and local government debt management in the past five years, the Plan pledges to increase central government’s spending responsibilities, adjust the distribution of value-added tax between central and local governments, establish a consumption-type value-added tax, reform the personal income tax system, roll out an environmental protection tax, and make progress on the property tax legislation. However the actual pace, in our view, may be delayed further.

Despite the recent de facto tightening of capital controls, the government is determined to further accelerate China’s opening up in the next five years. Overseas direct investment will be further encouraged via China’s going out strategy and Belt and Road initiative. Capital inflows will be further welcomed, and the RMB internationalization and capital account opening processes are set to be pushed forward in an “orderly” or “opportunistic” manner.

Overseas direct investment will be supervised primarily in a registration-based scheme, to underpin the continued rapid growth of the outbound investment. China also plans to participate more proactively in international cooperation and global economic governance. More domestic free-trade zones and additional bilateral and regional free trade agreements also lined up for the next five years. Despite the absence of more implementation details, Belt and Road progress is due to be accelerated, supported by the Asian Infrastructure Investment Bank and Silk Road Fund.

The 13th Five-Year Plan aims to increase the convertibility and free use of China’s currency and push forward its capital account opening in an “orderly” fashion. Aside from further liberalization of China’s domestic bond and stock markets to foreign investors, plans are also in place to relax restrictions on foreign investors’ ability to engage in onshore currency conversions, domestic entities’ foreign exchange activities, and multi-national enterprises’ cross-border capital operations. That said, with net capital outflows set to be higher than previous years, the path of China’s capital account opening and RMB internationalization will likely be more opportunistic and winding.