Chief China Strategist
Summary: The 2023 Central Financial Work Conference, led by General Secretary Xi, unveiled significant shifts in China's financial policies. It highlighted five core principles, notably omitting the term "deleveraging" and indicating a willingness to support local governments and the property sector. The reduced emphasis on "risks" and the increased focus on the housing sector implied a more accommodative stance. However, the conference signaled a retreat from marketization, giving prominence to governance and anti-corruption efforts. Concerns have arisen about China's productivity and development strategies. In terms of investment, a positive outlook is anticipated for mainland and Hong Kong stock markets, with the potential for a notable Q4 rally.
The Central Financial Work Conference, held on October 30 and 31 and chaired by General Secretary Xi, stands as a pivotal biennial event in the People's Republic of China. This gathering represents the paramount assembly of the Communist Party of China, dedicated primarily to shaping the nation's financial sector governance and charting the strategic course for financial system management. Notably, the 2023 conference marks a departure from the 2017 National Financial Work Conference, as it eliminates the term "deleveraging" and shifts focus towards "optimizing the debt structure." This transition has raised intriguing questions regarding China's financial future, its impact on the real economy, marketization, and investor sentiment.
The Central Financial Work Conference represents the apex of the Communist Party of China's leadership in financial sector governance and the strategic direction of the financial system. In 2017, at the last conference then known as the National Financial Work Conference, China initiated a deleveraging campaign targeting the property sector, shadow banking sector, and local government debts. The conference was originally scheduled for the previous year but was postponed. The conference's official statement emphasized five fundamental principles for managing the financial system: 1) the leadership of the Communist Party of China, 2) serving the real economy and the people, 3) structural reform of the supply side, 4) risk management, and 5) improving governance while combating corruption.
The 2023 conference diverged from the 2017 event, which prominently featured "deleveraging," as the term is conspicuously absent in the latest readout. While the 2017 statement stressed "strictly limiting the increase in local government debts," the 2023 statement focuses on "optimizing the debt structure of central and local governments." This shift may indicate a willingness by the central government to shoulder a greater fiscal burden to alleviate the financial stress of local governments. Recent actions, such as the approval of RMB1 trillion in additional central government bonds for natural disaster prevention and rehabilitation projects, suggest China is moving in this direction.
The mention of "risks" has also decreased to 16 times in the 2023 conference readout compared to 28 times in 2017. The 2023 readout mentions the housing sector four times, emphasizing macro-prudential risk management, liquidity circulation between the financial system and the housing sector, fund usage supervision, and equitable treatment of state-owned and privately-owned developers. This suggests a more accommodating stance compared to the previous conference's strict approach to highly leveraged property developers. Recently, the Shenzhen State-owned Assets Supervision and Administration Commission of the State Council (Shenzhen SASAC) and the Shenzhen Metro pledged support to Vanke, a leading Chinese developer.
In 2017, the conference pledged to enhance the market's “decisive role in resource allocation”, protect investor interests, and promote the development of small and medium-sized privately owned financial institutions. These pro-market policy stances are notably absent in the 2023 readout. Instead, the emphasis is on combating corruption and improving governance and supervision of the financial system. The readout explicitly highlights the political nature of financial system management. If implemented, these changes may indicate a shift away from marketization in China's financial system, favouring a smaller number of large state-owned banks and financial institutions.
As we have consistently emphasized, one of China's key challenges in boosting its long-term growth potential is improving productivity. This extends beyond technology and innovation and involves the elimination of inefficiency in resource allocation in economic activities. The subtle message conveyed in the 2023 Central Financial Work Conference suggests China may be heading in the wrong direction in this regard. However, much remains to be seen in the coming weeks as additional policies are rolled out, and notably, the direction taken by the Third Plenary Session of the 20th Central Committee of the Communist Party of China, poised to be held later this year or early next year.
Despite concerns about a potential retreat from the initiatives of enhancing marketization and support for small and medium-sized financial institutions, the absence of emphasis on deleveraging in the 2023 Central Financial Work Conference paves the way for more supportive financial and fiscal measures for local governments and the property sector in the near term. The mainland and Hong Kong stock markets are likely to benefit from this development in Q4, potentially leading to a significant year-end rally. China internet stocks, trading at an average of 14x forward earnings, offer a high-beta approach to position for a broad market rally with reasonable margins of safety.
The 2023 Central Financial Work Conference reflects tentative changes in China's financial strategies. The omission of "deleveraging" in favour of supporting local governments and the property sector is a notable shift, but concerns about productivity and resource allocation persist. The direction of China's long-term development strategies will be shaped by the Third Plenary Session, and investors should carefully evaluate the implications of these developments, with opportunities expected in mainland and Hong Kong stock markets, as well as Chinese internet stocks in the near term.
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