New institutional reforms and the results of the once-in-a-decade leadership reshuffle are expected to be revealed in the coming days, offering more insight on what investors can expect. Ahead of that, here are the key takeaways so far:
China’s economy could yet outpace these targets. The new “around 5%” GDP growth target is more modest than some investors and media reports had predicted. Less ambitious language on the target is not wholly unsurprising, given the wide miss for 2022 amid zero-COVID challenges. On monetary policy, the pledge to maintain a “precise and forceful” stance suggests only targeted liquidity and credit support. This signals no large scale stimulus measures now, but also leaves dry kindle in reserve if needed later. Fiscal policy was described as proactive and effective, and local government bond quotas were increased modestly to CNY 3.8tr, signaling more infrastructure spending to come.
A consistent tone on the property sector. Property-related aspects in the GWR were not new, and appear largely in line with the more supportive tone of recent communications and policy priorities, including resolving quality developers’ risks and improving their balance sheet conditions. Notably, the “housing is for living in, not speculation” phrase of recent years has been moved from the policy suggestion area of the GWR into the past achievements section. The new urban job creation target was lifted to “around 12 million,” up by a million from last year, suggesting incremental demand to come. We remain constructive on select China investment grade and BB-rated property bonds, while cautious on bonds rated B and below. On the equity side, we still see reason for caution on property developers.
Policy seeks to boost higher-value sectors, private market confidence. In a nod to investor concerns, outgoing Premier Li said the government would support the development of the private economy, protect the property rights of private enterprises and entrepreneurs, and lean on the private sector to execute on tech innovation. Other GWR pledges included deeper reforms of state-owned enterprises, a further opening up of the service sector, and more investments in industrial upgrades. A rise in defense spending to 7.2%of GDP and other self-reliance measures underscore the ongoing era of security and its investment ramifications across energy, food, and global supply chains.
So, the new “around 5%” GDP growth target for 2023 appears attainable, given the ongoing recovery in consumption, resilient investment, and very supportive base effects from a weak 2022. We believe this newly detailed set of growth-friendly policies, including support for the private sector, should serve to strengthen market confidence in China’s recovery. We expect select zero-COVID exit beneficiaries to outperform in the coming months on a sustained economic and earnings bounce. For the MSCI China, we anticipate earnings growth could reach around 14% y/y this year, far outpacing its regional peers. Broader EM equities, as well as US and European companies highly exposed to Chinese spending, such as the EU consumer discretionary sector, should also benefit. We hold a preference for emerging markets in our global strategy, while in our Asia strategy we rate China equities as most preferred. The yuan should also appreciate in 2023 on the back of China’s GDP growth rebound, with USDCNY forecast to reach 6.5 by year-end.
Main contributors - Mark Haefele, Eva Lee, Jon Gordon, Kathy Li, Wendy Luo
Content is a product of the Chief Investment Office (CIO).
Original report - China’s 2023 recovery playbook, 6 March 2023.