President Xi Jinping’s recent speech to the Party Congress should provide a welcome boost to the country’s equities market. That was one of the observations from market observers regarding the twice-in-a-decade keynote address Xi gave on Sunday.
China is holding its 20th Party Congress in Beijing, a national assembly that is held every five years, where more than 2,000 delegates gather to amend and approve the country’s policy direction for the next half a decade.
Xi, who is expected to announce an unprecedented third term as the leader of China, gave a speech on Sunday, the work report, which summed up the progress of the country’s policy initiatives over the past five years as well as its future direction.
FSA talked to several industry experts regarding the impact on various sectors, especially property and technology.
Although there were no major surprises from Xi’s speech on Sunday, UBP told FSA that it noticed a shift in emphasis towards long-term development and security and away from the economy and reform.
“This inflection point will help to boost Chinese equities. However, this might not take the form of a sudden surge, but a gradual recovery,” Carlos Casanova, senior economist for Asia at UBP, told FSA.
“The main factors other than a more supportive macro environment are: improved visibility and sustained policy support. Investors ought to be more selective and align with the key policy priorities. We believe that the following sectors could benefit: consumption, services, core technology, high-value added manufacturing and healthcare.”
As the political report aims to provide a long-term roadmap for economic development, it is less relevant for short-term trading, noted Axa IM.
“Within equity, we are looking at sectors aligned with the Party’s long-term development ambitions – technology (for raising the quality of economic growth), green sectors (renewable and EVs) for building a low carbon economy and energy security, and smart manufacturing/industrial for reducing China’s reliance on foreign production inputs,” said Aidan Yao, senior emerging Asia economist at Axa IM.
“We identify these as long-term beneficiaries of China’s push to build a clean, efficient and secured economy, with excess returns likely to only be realised with successful implementation of its transformation.”
Gary Ng, senior economist at Natixis, also noted potentially stronger government support in the tech and green sectors, especially in semiconductors, renewable energies and electric vehicles.
Speaking to FSA, Guan Yi Low, head of fixed income for Asia Pacific at M&G Investments, thinks it is too early to establish who are the clear winners and losers at this stage.
“While technology innovation and green development were points of focus during the speech, we will be looking out for post-Congress meeting policy details to assess the form of government support for the related sectors,” she said.
“At the same time, given that the Party’s Covid stance remains unchanged, hopes of a rebound for sectors weighed down by the lacklustre consumer demand have been dampened.”
The government has been focused on deleveraging in the property sector over the last two years by imposing strict liquidity requirements on developers’ borrowings.
Coupled with a regulatory clampdown and subdued market sentiment, the property sector in China has been one of the hardest hit sectors with a number of real estate companies defaulting on their offshore bonds.
“There was no change in tone from the Party Congress regarding the ‘homes for living, not for speculation’ mantra. Xi did not mention it in his opening speech but it was included in the full printed version of the Congress report,” Yao from Axa IM noted.
“We don’t see a policy u-turn, with incremental policy easing and support expected to continue to stabilise the market and cut off contagion risks from the sector. The real estate market will likely remain a drag on growth in 2023 but much less so compared to this year.”
Tao Wang, head of Asia economics and chief China economist of UBS investment bank research, also noted that there was no specific mention of the property downturn or near-term economic policy.
Yet, she believes the upcoming Economic Work Conference in December will likely shed more light on the government’s short-term policy undertaking.
“Meanwhile, we expect the subdued recovery in the third quarter and continued downward pressure in the property sector to trigger more piecemeal easing measures, similar to what we have seen in recent months.”
Natixis’s Ng noted that despite the recent fine-tuning of policies, home prices remain sluggish and households expect it to fall further.
“It means the real estate sector will face the same headwinds in weak demand and cash flows, even though the situation may be slightly better.”
Commenting on the property sector, UBP’s Casanova believes high-yield bonds, especially those by property developers, will remain underperforming.
“So far, the measures to stabilise the sector have been very targeted, with local governments enjoying more autonomy in determining how they bring about stability in their local property markets,” said Casanova.
“Therefore, we think that pressures on the high-yield space will remain for some time, as it may still take months to achieve this objective given the low starting point and longer construction cycle.”
Casanova’s bearish views on property high-yield bonds were echoed M&G Investments’ Low.
“This unchanged [housing] policy stance has reduced hopes for an aggressive nationwide property measure easing. China high-yield property credits have also continued to trade lower in recent days amid continued concerns over the liquidity of property companies as property sales remain weak,” said Low.
Apart from the property sector, tech giants such as Tencent, Alibaba and Baidu have been slapped with heavy fines for violating anti-monopoly and anti-trust laws.
While national security was one of the major concepts featured in Xi’s speech on Sunday, Axa IM believes the regulatory headwinds for the internet and platform economy sector are basically over with key pillars of data security law now in place.
“Growth in this area will largely depend on consumption, which should gradually recover when China begins to shift away from zero-Covid,” said William Chuang, Asian equity portfolio manager for industrial automation and AI specialist at Axa IM.
While Low at M&G Investments also expects a reduction in regulatory measures taken against the tech giants in the coming year, she warned that the sector will still have to face the potential headwinds arising from geopolitical tensions between China and the US.
“For example, the US’ tightening of advanced chip exports is likely to lead to longer-term earnings impact on selected technology companies, such as China upstream chipmakers. Bottom-up credit selection will thus remain key in navigating the different set of challenges,” Low added.
Yet, Ng from Natixis believes as national security becomes the core of China’s policy, the hope of loosening regulations on internet platforms is still dim.
Within the technology sector, UBP believes that while any project that can reduce carbon intensity is eligible to apply for subsidised loans under a new lending facility, electric vehicles, battery technology and nuclear energy are set to benefit in particular from the clean energy drive as China continues to pursue its carbon neutral objective by 2060.
“However, President Xi specifically mentioned that China would proceed with caution and would not stop burning fossil fuels until clean energy can reliably replace them. China invests more than any other country in renewables, but this has not been enough to meet its energy and efficiency needs,” Casanova added.