A return to growth and policy continuity for China

As the National People’s Congress (NPC) concluded in Beijing this week, China has firmly set goals in expanding domestic consumption and supporting a steady and broad-based economic recovery. The key economic objectives for 2023, including the much talked about GDP growth target, are modest and in line with market expectations. Though relatively conservative, we believe well defined growth targets and a clear policy direction from the NPC will help stabilize market confidence. We find the NPC announcements positive, supporting our long-term investment outlook for China markets. More specific details from the upcoming state council meetings and the politburo meeting in April will give us more information to assess the policies rolled out by the new cabinet and the progress of implementation.

As Xi Jinping begins his third term as president, the shake-up of the leadership team has also been completed. That said, the reappointments of several top economic officials suggest an emphasis on policy consistency and market confidence as the country recovers from the pandemic and refocuses on the economy. Striking a more business-friendly and pragmatic tone, talk of improving the entrepreneurial environment and boosting employment opportunities is a departure from the regulatory actions in recent years and bodes well for the private sector.

Overall, we think the major growth targets in employment, inflation, liquidity and credit are what markets have expected. The around 5% target for the annual GDP growth is relatively conservative, but we see it as a floor rather than the mean, particularly considering last year’s low base of 3% – one of the worst growth rates in recent history.

In addition, the target for the fiscal deficit-to-GDP ratio is 3%, compared to 2.8% for 2022. However, we believe augmented fiscal deficit accounting for all sources and use of funds would at least be on par with last year’s deficit.

The 3.8 trillion yuan target for local government special bond (LGSB) net financing quota is also not the full story. Unused quota can easily be tapped (as last year), and policy bank financing will also become an important addition.

The Chinese government’s confidence in achieving the growth targets is at least partly supported by high frequency data on mobility, home sales and car sales. Economic data for January and February, including industrial output and retail sales, have markedly improved. Bottom-up surveys seem to support a sequentially stronger growth quarter by quarter.

Given the increased economic activities and a recovery trajectory, we do not expect a massive stimulus package to boost the economy or a pivot away from the accommodative policy stance set in the Central Economic Work Conference in December. This is not a surprise as markets have already started to regard a large scale, broad-based stimulus program unlikely. Instead, the fiscal stance remains expansionary under low inflationary pressures. Consumption and investment targeting supportive measures are the focus, and we believe any stimulus this year will be front-loaded to maintain the growth momentum.

China is restructuring its state institutions for more seamless oversight and consistency across different regulatory bodies. The aim of these ‘Super Agencies’ is to increase focus on tech innovation, manage financial risk and ensure social stability. For example, a new agency, the National Financial Regulatory Administration, should reduce risks from regulatory arbitrage that arose from a less coordinated financial regulatory framework. It also aims to reduce conflicts of interests by separating responsibilities, such as regulatory versus financial development. Another agency, the National Data Bureau, will focus on data governance amid the rise of big data, ensuring that economic development and security considerations coexist. The new cabinet selection is a reflection of these goals and represents a push towards economic growth. Most leaders came from a strong industrial and technology background. At the top levels, including Premier Li Qiang, they also have a pro-business reputation.

In the end, NPC announcements reinforce our long-term investment case for active management and our outlook for China has not changed. However, short-term risks do exist.

We believe volatility will continue with a more hawkish US Federal Reserve in the background and geopolitical tensions rising since the end of last year. In this environment, we continue to see a multi-asset approach as an effective solution while staying diversified and protected against downside risk. China equities represent a significant opportunity for alpha capture from the normalization and recovery theme. China onshore bonds also remain attractive when factoring in hedging, and a combination of China rates and credit could generate attractive returns.