Four Chinese equities investors give their view on the 19th standing committee of the National People’s Congress, marking the start of President Xi Jinping’s second five-year term.
Eric Moffett, portfolio manager of the T. Rowe Price Asian Opportunities Equity fund
President Xi Jinping’s has been clear he wants to push through supply-side reform, remove excess capacity and clear up the financial system. Some commentators are dismissing this as just rhetoric, but Xi was similarly dismissed when he launched his anti-corruption campaign a few years ago and he made good on his word.
From an investment standpoint, if Xi can tackle China’s structural problems vis a vis leverage and supply-side reform, it will be positive for China’s terminal value, but could be negative for growth in the near-term. What it means for markets is the next question. Over the long term, it could be positive for the Chinese economy but may in the near-term create buying opportunities for certain stocks.
If Xi can push through reforms of SOEs and change management incentives to focus on delivering shareholder value, many of the companies regularly dismissed by foreign investors will come back into focus. The authorities are already testing reforms, with China Unicom being one of the companies undergoing significant reform. This could be a catalyst for more reform.
Regardless of whether reform intensifies, we have in recent years seen improved management discipline in China, with businesses now throwing off a lot of free cash flow after significantly cutting unnecessary capex. It is a complete reversal of what we witnessed five or so years ago and we believe the boom in free cash flow is still underappreciated and undervalued by the market.
Craig Farley, lead manager of the Ashburton Chindia Equity fund
For investors, the clear message that should come out of the congress is that President Xi is becoming ever-more dominant, and indications are that the current General Secretary will enjoy an unusual opportunity to mould China’s top political bodies to his vision.
President Xi’s upcoming second term is likely to emphasise environmental policies to improve the quality of life for Chinese citizens. Expect anti-pollution measures to continue featuring high on the priorities of the officials. Urban infrastructure will also be radically industrialised to make cities more liveable, while ongoing efforts to reform the hukou registration system will be increased to integrate migrant workers into cities.
The target of doubling living standards from 2010-2020 remains in place, but stronger than expected growth this year affords the administration some short-term breathing space.
Themes and sectors that may benefit include major industrial state-owned enterprises (SOEs) in monopoly sectors, such as telecommunications and energy – as well as investment-led sectors, such as building materials, resources and capital goods, defence and public security. Environmental-related sectors may also receive a boost, like electric vehicles, nuclear, solar and wind power.
Witold Bahrke, senior macro strategist at Nordea Asset Management
As more than 60% of the communist party’s central committee will rotate, alongside the possible retirement of five of the seven all-important politburo standing committee members, this marks undoubtedly a landmark moment for Chinese politics. This allows Xi – already one of the strongest Chinese leaders of recent decades – the possibility to consolidate his power further.
Traditionally, the second term of a presidency in China is where most changes are implemented. This is why Xi’s second term it is so important. As China faces the structural challenge of a high and rising debt, combined with the potential of slowing growth, it risks being caught in a middle income trap. So far, the government has not found convincing strategies to cope with its economic challenges.
In our view, the global recovery has been very much driven by China. Therefore, the global cyclical situation probably hinges more on China than ever before, as the Asian powerhouse is by far delivering the biggest contribution to global growth.
This month we will learn more about how the Chinese leadership will change, but the focus will be mostly on pure politics. The economic impact, while all important, will probably not be clear before early next year. In the meantime, we expect the leadership to prioritise financial and social short-term stability concerns, as opposed to long-term reforms limiting the dependency on debt as a growth driver. In other words, debt will continue to grow, albeit with a changing composition. We expect growth to slow, without falling off a cliff.
Gary Greenberg, head of Emerging Markets at Hermes Investment Management
The Congress, while politically important, is likely to be an economic non-event – which will simply see Xi’s already burgeoning power consolidated further. The outlook for China in the medium to long-term is better than the bears think, despite the fact China has been growing on the back of debt. The authorities have done a good job of reducing the external portion of the debt, so US rates will have to rise over 150 basis points to expose the Chinese economy.
On the flip side, almost all of the innovation in emerging markets is happening in Asia: only 1% of the emerging markets information technology sector is based outside of the region. China, in particular, is rapidly moving towards an innovative economy – with the proportion of intangible assets to total market capitalisation rising rapidly.
A major reason for this is that the free cash flow available to Chinese companies allows them to ramp spending on research and development, which is rapidly approaching parity with the US. This is one of the many factors which has allowed China to increase its share of high-value exports and become the largest e-commerce marketplace in the world.
These secular long-term themes, which are structurally changing the Chinese economy, have their avatars in a number of attractive Chinese companies which we hold, resulting in a moderate overweight position in the market. We are keeping a weather eye on the government’s attempts to deflate the property sector mania, which if left untrammelled could result in economic dislocation.
