Short-term selling pressure
President Xi’s consolidation of power on the CCP standing committee and his focus on security prompted investor misgivings and an equity market sell-off, but from an economic policy perspective the congress in Beijing did not signal any clear change of direction.
In particular, there were no new measures announced to address the downward trajectory in the property market which has prompted investor worries over future economic growth. Instead there were simple restatements of the desire to establish healthy property sales and rental markets. Xi’s power consolidation implies policy making should be a smoother process than before, but market is concerned that it also implies more restrictive policies may be implemented.
Zero-Covid stays, as expected
We have been warning our investors that expectations of a step change in the zero-Covid policy were unrealistic. The policy is regarded as successful in its objective of saving lives, despite the economic costs, and it was highly unlikely that President Xi would U-turn on a position which contrasts clearly with the scattergun approach to locking down and re-opening that the US and Europe employed.
However, as we anticipated, the Chinese authorities are taking a more nuanced approach to zero-Covid with lockdowns localized, and lifted more rapidly. Overall we believe the Chinese authorities will be more judicious in their approach to Covid going forward, with the vaccination program achieving its goals, and dedicated resources in place, limiting the economic impact.
Economic development still the priority despite the challenges
Despite the absence of any kind of post-Covid stimulus plans, the positive news from this congress was that the long-term approach to development was restated, with still ambitious economic growth targets. Xi said1, “the Chinese economy is resilient. Economic potential is ample. There is large room to maneuver. Long-term sound economic fundamentals won’t change”. China is enduring a slowdown in economic growth relative to previous decades, but we also believe media talk of a strategic pivot2 in economic policy is exaggerated given President Xi reiterated that economic development to improve living standards remains the party’s number one priority.
Green economy, self-reliance and common prosperity are the key long-term themes
Xi also reiterated China’s approach to decarbonization with the build out of new renewable energy capacity to accelerate, and the green economy regarded as critical to China’s long-term energy security. We believe China’s drive for technology self-reliance and supply chain security will have positive implications for investors. China will use the whole country system to establish national projects, with both State Owned Enterprises (SOEs) and the private sector to participate in the development of core technology and high-end manufacturing. As we have consistently stated an active investment strategy is the correct approach to these structural opportunities and SOEs should not be simply excluded. To ensure food security, for example, China needs to develop a more sophisticated agricultural sector with consolidation of farms, biological IP (seeds), crop planning, seeding and harvesting technology, as well as enhanced animal pharmaceuticals, all areas where SOEs as well as the private sector will be involved.
Xi’s ‘common prosperity’ is aimed at reducing income inequality, raising living standards and employment, while regulating the accumulation of wealth. It is fundamentally about inclusive growth with a fair return to labor, equal opportunities, and an enhanced social security network. How these policies will be implemented remains to be seen but it is worth monitoring.
Implications for investors
Although economic growth numbers will inevitably continue to moderate over the years, this slowdown will be largely compensated by higher-quality growth. In our approach we follow a barbell strategy: on one hand we remain defensive, and on the other hand, we focus on structural growth and reform drivers of the Chinese economy while selectively investing in structural winners within the themes. It’s the long-term themes where we think value currently lies, including the green economy, technology innovation, and industrial upgrade. Valuations have become very attractive from a historical average point of view, but we are still waiting for near-term catalysts. The next event to watch is the Central Economic Work Conference in December.