Following China’s 20th National Party Congress, President Xi Jinping’s consolidation of power is clear. What is less so, at least from the perspective of investors, is how the government of the world’s second largest economy will henceforth deal with burgeoning issues ranging from its strict Covid policy to the ailing property sector.
Stock markets in mainland China and Hong Kong have fallen sharply in the days following the conclusion of the meeting. Shares of companies based in mainland China and Hong Kong, and traded elsewhere, such as the US and Singapore, lost ground too, as investors fret over the perceived reduced checks and balances among China’s leadership, with many assuming further introduction of policies not deemed friendly to the markets.
From the perspective of Bank of Singapore’s chief economist Mansoor Mohi-uddin, the unbalanced focus in favour of security issues rather than economic fears, and China’s directionless take on its zero-Covid policy, have created greater pessimism in the space.
Nevertheless, Xi has brought forward a number of key goals for China’s future, signalling how growth is a priority for China to turn it into a “medium-level developed country” by 2035.
When China delayed the announcement of its 3Q economic data during the week the congress was held, investors were bracing for the worst. As it turned out, the reported number of 3.9% y-o-y growth beat market expectations of 3.4%. Industrial production also rose by 6.3%, well above market consensus of 4.5%.
Victoria Mio, head of equity research, Asia Pacific, at Fidelity International, believes that China remains as keen as ever to generate economic growth. However, the bid to drive growth now comes with conditions. Specific sectors identified for support include biotechnology, semiconductor development, higher manufacturing and new infrastructure.
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“We do expect to see an increase in focus on growth in these areas,” says Mio in an interview with The Edge Singapore. “But bearing in mind Xi’s emphasis on stability and Common Prosperity narratives, our interpretation is that ultimately, this is part of a long-term strategy to achieve sustainable growth and policies that create a more equitable society.”
This will be no easy task to achieve in the coming months, as DBS Group Research chief economist Taimur Baig and strategist Duncan Tan estimate that a significant average of 4.5% to 5% annual growth would be required to achieve Xi’s current targets. This is a far reach as China’s growth numbers currently hover around the 3% region, and are expected to stay subdued at these levels for 2022, according to Mohi-uddin.
One key obstacle to achieving such growth levels would be China’s continued zero-Covid policy. Repeated lockdowns, business closures and border restrictions over the past two years have taken a toll on the once-bustling economy.
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At the congress, Xi was quick to defend the policy that stands to “protect the people’s health and safety to the greatest extent possible”. The absence of any policy pivot thus far is “backward-looking” for the state, according to Aidan Yao, senior Emerging Asia economist of AXA IM.
Mio agrees that the lack of change to China’s stringent Covid policies has been undoubtedly disappointing for investors, although this should not be too surprising. An unverifiable screen cap supposedly describing China’s reopening plan, made its rounds on social media and triggered a rally on Nov 1 and 2. However, on Nov 3, the National Health Commission maintained the country’s zero-tolerance approach towards the pandemic, thereby rolling back gains made by so-called reopening stocks such as restaurant operators.
“The policy will ultimately continue to remain in play, as China does not want to risk millions more deaths from Covid-19 and/or a collapse in their healthcare system [which could invariably pose greater damage to their economy in the long run],” Mio says.
Mio expects to see a “continuous optimisation” of the policy where, instead of widespread total lockdown of entire cities, “rapid localised control” is preferred, so as to strike the balance between pandemic control and economic growth.
Other observers expect the zero-Covid policy to be reversed gradually and cautiously over the next two quarters. Other shifts in this direction include potentially shortened quarantine period for visitors, says Alec Jin, investment director of Asian Equities at UK asset management firm abrdn. “From our end, as case numbers appear [more] under control with fewer lockdowns, we are expecting a gradual easing of Covid restrictions, but this depends on the progress of vaccinations too.”
Mohi-uddin says: “For 2023, we need to see [a conscious effort by the Chinese] government to start easing its zero-Covid stance to achieve our forecast for GDP to grow by a more solid 4.5% and thus help financial markets recover this year’s losses.”
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Real estate woes
China’s formerly red-hot property sector has cooled considerably, as the government is preventing prices from surging beyond already unaffordable levels for many, in line with its over-arching Common Prosperity policy goal.
When a growing list of beleaguered private developers defaulted on their debt-pile, threatening to spark off a wider crisis, various local governments stepped in with targeted support in a bid to temper the impact of a big stick. After all, China’s real estate sector contributes 25% to 30% of its GDP and makes up around half of the private wealth, estimates DWS Group.
“The government has been quite determined to control its property sector, and better manage its leveraging process moving forward, and act in a more systematic way, helping city by city,” Fidelity’s Mio says.
That being said, gloomy clouds are expected to linger over the sector, as the support measures take time to become effective. For one, new home sales will likely continue to decline in the short run, adding to further downward pressure on the economy as a whole.
“These effects will likely spill over to the entire supply chain backing the property sectors, in the areas of the supply of construction materials, equipment, steel and cement,” Mio explains. “This has already been evidenced in China’s 3QFY2022 results season, with both upstream and downstream aspects of the construction supply chain taking a hit.”
Other experts remain unimpressed with the congress’ recent stance on China’s real estate conundrum, citing “little [to no] change with regard to real estate support”, particularly considering the extent of distress created for property developers, local governments and property owners alike.
“We believe the government continues to stabilise and support the property sector, but it is worth noting that the measures [by the Chinese government] are rather localised and targeted, and we have yet to see any comprehensive or broad-brush support for the entire sector,” says abrdn’s Jin.
Energy trump card
On the other hand, observers have identified several growth sectors, such as manufacturing and clean energy, that will take up a bigger space on the centre stage in the years ahead.
“Another key tenet of emphasis from the party congress has been on green and netzero commitments, with the renewed assurance of China’s long-term goals to be carbon-neutral by 2060 and its aims for peak carbon emissions by 2030,” says Mio. “With that, we are confident that there will be little to no detraction from its ambitious decarbonisation plans [to be a leader in energy security].”
According to Mio, China’s strength in this department has come to the fore most recently in its development in the electric vehicle (EV) sector, driven originally by the government’s push but also very much by the energy crisis at large. “In this transition [to EVs], many new winners and losers are going to emerge,” says Mio. “It’s likely that a lot of the winners will be coming from China, because it has long had a first-mover advantage in this area, having begun their scaling up and resource gathering process as early as 2020.”
In 2021, China accounted for around half of global sales of EVs, and it continues to host six of the top 10 battery manufacturers globally, according to Allianz Global Investors. Jin also concurs with Mio’s observation of China’s first-mover status in energy, considering how China dominates global manufacturing capacity for renewable energy and storage, accounting for 90% of solar and 75% of battery capacity.
“Decarbonising economies requires huge investment in renewable energy and storage, which leaves China in line to benefit,” explains Jin. “As other industries [and regions] need to do their part in decarbonising, we expect greater investments [to be made in due time] in upgrading machinery and increasing energy efficiency.”
“At present, more than 70% of the global production of the upstream components [of EVS] is based in China, so we do expect steady growth to continue in this area,” adds Mio. “[With its size] and its supply-chain readiness, China will be able to supply its own demand, but it’s likely that they will look towards exporting overseas [even more] as well.”
According to Mio, China expects to double the returns from its investments in its renewable energy sector. “This stands to provide a lot of significant opportunities for investors, as well as be a central growth driver for the country,” she adds.
Mio is optimistic that China is now on a steady road to recovery. “We are now at the tail-end of the economic downcycle, and considering how monetary easing has begun [as early as] 4Q last year, we should be seeing a gradual and consistent recovery from now on,” she says.
“With the help of local governments, property companies and [a growing manufacturing sector], this will drive [certain] economic recovery that we expect to see by the second quarter of next year, or as early as the first quarter,” Mio adds.
Others, however, are less hopeful and more cautious. “Insofar as long-term goals and directions are concerned, Xi has hit all the right notes on what the market is looking for,” says AXA IM’s Yao. “However, saying is one thing, and doing is another.”
Cover photo: Bloomberg
