Market Views: Key takeaways from China's Two Sessions

The just-concluded annual parliamentary meetings of China ushered in a new generation of government leaders as President Xi Jinping begins his unprecedented third term. Amid changes and reforms, investors are taking note.
Market Views: Key takeaways from China's Two Sessions

With Covid-19 in the rear-view mirror, China has set its annual growth target conservatively “around 5%” at the Two Sessions, the annual plenary meetings of legislators and policy advisors, that ended on Monday.

During the meetings, government officials were reshuffled with new Premier Li Qiang taking over from Li Keqiang as the country’s No. 2 leader.

In his debut on Monday, Li Qiang reiterated high-quality growth for China, sent a friendly signal to the private sector, and called for cooperation with the US.

Meanwhile, China announced grand institutional reforms in industries including finance, science and technology as well as the establishment of a national data bureau.

On the financial front, a National Financial Regulatory Administration will be set up to regulate the industry excluding securities, replacing the China Banking and Insurance Regulatory Commission (CBIRC) and adding functions from the People's Bank of China (PBOC) and the China Securities Regulatory Commission (CSRC).

There are also the unchanged. To the market’s surprise, China retained PBOC governor Yi Gang and finance minister Liu Kun, a move that was believed to be prioritising policy continuity in economic recovery.

This week, AsianInvestor asked asset managers about the keynotes they took from China’s Two Sessions, and their outlook for investment in China in 2023.

The following contributions have been edited for clarity and brevity.

Kai Kong Chay, senior portfolio manager, Greater China equities
Manulife Investment Management

Kai Kong Chay

China strives to maintain accommodative monetary and fiscal policies, which set the stage for economic recovery for 2023. 

China places high emphasis on modernisation of industrial systems and pledges to focus on key industrial chains in the manufacturing sector. We see opportunities in manufacturing upgrade as automation is an unstoppable trend in China.

We expect reshoring demand in traditional industries like industrial and manufacturing post Covid outbreak, given that capital expenditures in some industries are under-spent during the last quarter of 2021 to 2022. We favour automation-component companies that are leaders in respective component segments with strong research and development (R&D) capability and product pipelines, as well as vertical integration capabilities increasing ability to control costs.

Meanwhile, China pledged to support the platform economy and protect the rights of private businesses and entrepreneurs. We are positive on online platform companies related to enterprise digital transformation, recruitment and online gaming with healthy balance sheets and cash flows, which are expected to further improve as China re-opens.

Technology innovation and localisation remain a structural theme. We maintain a positive view on selective A-share semiconductor component companies, design houses and fabrication equipment leaders benefiting from localisation opportunities.

Overall, we believe policy support shall drive consumption recovery, industrial upgrades, technology innovation and localisation while mitigating risks in the property sector.

Alec Jin, investment director of Asian equities

Alec Jin

The market was not expecting any major stimulus to be announced during the Two Sessions. Whilst setting a growth target of around 5% GDP may be seen as conservative, potentially to reduce the pressure to deliver fiscal stimulus, the tone from the government has been clear—they need to take steps to aid an economic recovery.

Though a lot of the early headlines have been focused on China’s military spending, which was a fairly modest increase in our view, the government emphasised the need to expand market access for foreign investors, prop up consumption and control the risk in the housing sector. We expect more details on how Beijing will go about achieving these goals to emerge in time.

New Premier Li Qiang, in his first address, reiterated high-quality growth and development as a top priority for the government. While fiscal spending may likely be modest, the government still has a policy arsenal of tools at its disposal should there be a need to provide more support to the economy.

In fact, early indicators of economic momentum have been encouraging: PMI numbers have rebounded for January and February; credit growth is picking up; mobility data and hotel revenues have improved significantly. Housing transactions for February and retails sales growth for the first two months have come in better than expected.

All in all, as economic recovery gains momentum, we believe the confidence of China’s growing middle class will come back, which will drive economic growth in the country. This is why we prefer the consumer sectors over the medium-to-long term. We look for high-quality companies across the five themes – aspiration, digitalisation, going green, health and wealth – where we find the most compelling opportunities.

William Fong, head of Hong Kong China equities

William Fong

We are constructive on the news and policies coming out of the Two Sessions in 2023. There has been an effort to ensure economic stability and policy continuity in President Xi’s third term. The GDP growth target of 5% is likely attainable by a combination of organic recovery and policy support, and many of the headwinds in 2022, such as Covid, would likely diminish in 2023.

The institutional reforms are aimed at improving overall efficiency of regulatory oversight on the financial markets, while the retention of key state officials sends a clear message of policy continuity – both are welcomed by the markets.

Other policy priorities, such as technology and innovation, supporting domestic economy and consumption, continue to be essential to China and are therefore to be anticipated.

We will continue to closely monitor various economic indicators and identify companies with attractive fundamentals and benefitting from structural growth opportunities.

As the economy gradually normalises, structural trends such as sustainable growth, self-sufficiency in the supply chain, scientific and technological innovations, and environmental awareness will continue to unfold. This should bolster the outlook for sectors and themes such as new infrastructure, domestic consumption, healthcare, technology localisation and sustainability in the medium to long term.

Michele Barlow, head of investment strategy and research, Asia Pacific
State Street Global Advisors

Michele Barlow

On the economic front, a target of around 5% GDP growth with no major stimulus was announced. This suggests that policymakers remain confident that the economy is recovering without the need for significant additional support. That said, the fiscal deficit-to-GDP ratio target was set at 3%, stepping up fiscal support moderately. 

While the market had been anticipating a higher growth target given the year-to-date rebound in economic growth, which has surprise on the upside, it would appear that policymakers are taking a more conservative stance. To some degree, this may be due to global growth uncertainty but could also provide room to resume the local government de-risking and de-leveraging which had been put on pause over the last three years as local government was required to step up to support the government’s zero-Covid policy.

An institutional reform plan was also released to further consolidate financial regulation, more effectively promote science and technology, and enhance data regulation. The financial regulation proposal suggests the desire to strengthen supervision to contain risk. Reducing risk has been at the heart of many of China’s recent reforms including a focus on the property sector and the “platform economy”. 

While this is positive from a longer-term development standpoint, it does increase market volatility and create investor uncertainty. We believe that taking an active approach can help manage some of these risks.

Dong Chen, head of Asia macroeconomic research
Pictet Wealth Management

Dong Chen

On monetary policy, the government advocated “targeted and forceful” policy tools. This may suggest there is a low probability of blanket easing such as cuts in policy rates or banks’ required reserve ratios in the coming months, whereas there may be scope to deploy more structural tools such as targeted credit facilities.

The government work report makes it clear that supporting the recovery of domestic consumption will be a key focus this year. We expect more measures to launch at both national and local levels in the near term, such as continued support for rural households and large-ticket items like automobiles.

[In his last government work report delivered on March 5], Li Keqiang’s comments are positive for the revival of business sentiment in China. It’s also worth noting that, unlike last year, there was no mention of anti-monopoly regulations in Li’s work report. This could be a positive signal for China’s tech sector.

The work report stresses the strategic importance of China’s self-reliance in key technologies and the need to encourage R&D as well as to strengthen strategic leading-edge industries. In addition, it advocates boosting the digital economy.

Overall, China’s re-opening will also benefit the rest of Asia, in particular Hong Kong, Macau and Thailand, as tourism in the region recovers.

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