Chief China Strategist
Summary: China's economic strategy is now focused on high-quality development, emphasizing technology, innovation, food security, and social stability over short-term stimuli. China aims to address technological chokepoints and achieve self-reliance. The elevation of scientists to influential roles in the political landscape reflects their recognition of the interplay between governance, science, and national development goals. Investors have intriguing avenues to participate in China's technological renaissance through A-share ETFs. These investment vehicles offer access to China's technological ecosystem beyond consumer-facing technology companies listed in Hong Kong and overseas.
Against the backdrop of the seemingly slow pace of economic recovery in the second quarter, it might be surprising that China hasn't implemented massive counter-cyclical policies as it did during the 2008 global financial crisis and its aftermath through 2010. However, a deeper examination reveals a crucial shift in focus. While growth rates were previously paramount, China's current economic strategy revolves around the quality and sustainability of development.
As the dust settles on the monumental achievements of rapid growth in the past decades, China's leadership has embarked on a new and equally audacious journey – one that seeks to transcend traditional notions of growth and forge a trail toward high-quality development. At the heart of this evolution lies a profound quest for technological self-reliance, agricultural modernization, and a new development pattern that focuses on boosting domestic demand and deepening supply-side structural reform. Central to China's narrative of high-quality development is its steadfast pursuit of technological breakthroughs and self-reliance.
As we advocated in our previous China Update, instead of waiting for an elusive massive stimulus package and bailing out of the property sector reminiscent of the mythical Godot, investors could probably put their capital to work on industries positioned to benefit from the high-quality development policy and the quest for technological innovation tailwinds. In our previous notes, we highlighted the opportunities in mega-cap Internet stocks. In this note, we delve further into the multifaceted concept of high-quality development and look beyond the Internet stocks for potential opportunities.
While China's impressive economic growth in the past several decades has brought about remarkable advancements, it has also highlighted areas of technological dependency. China recognizes that to achieve true high-quality development, it must address these technological chokepoints – areas where foreign reliance hinders its self-sufficiency and resilience. One of its think tanks has identified 35 "stranglehold" technologies that are vivid examples of some of these chokepoints, ranging from photolithography machines for microchip manufacturing, high-strength stainless steel, steel for high-end bearings, milling cutters, to underwater connectors, that could detrimentally disrupt China’s industrial supply chain. In the absence of these technologies, China's high-speed trains, submarine observation network, diesel engines, lithium batteries, and many others will be brought to a halt.
Embedded within China's journey in search of technological innovation, the Communist Party of China (CPC) has notably selected five former prominent scientists or technological experts turned government and party officials, among the 11 newcomers into its 24-member Politburo at the 20th National Congress of the CPC in October 2022. This markedly differs from the preference of picking officials with strong professional experience in economic planning, provincial governing, and party work into the top ruling body of the CPC over the past four decades. These five new Politburo members include an environmental scientist (Professor Chen Jining), a nuclear scientist (Dr Li Ganjie), a space scientist (Professor Ma Xingrui), a rocket scientist (Dr Yuan Jiajun), and a military-industrial engineering expert (Zhang Guoqing). The elevation of officials which had spent a large part of their career as scientists to influential roles within the political landscape is a testament to China's recognition of the interplay between governance, science, and national development goals. It may arguably underscore a deliberate effort to cultivate an environment where technological advancements flourish under the protective wings of the CPC.
China has painted a portrait of a nation poised to redefine its model of development. The commitment to technological advancement crystallizes China's resolve to chart a course that is not just about growth but about growth with longer-term developmental purposes.
Amidst this transformation, investors keen to participate in China's technological renaissance are presented with intriguing avenues, one of which lies in A-share ETFs accessible through Stock-Connect. These investment vehicles offer an opportunity to tap into China's vibrant technological ecosystem beyond the predominantly consumer-facing technology companies listed in Hong Kong and overseas. Listed in the table below are examples of some of these A-share ETFs, which are not recommendations but illustrations of what could be available for investors to consider after their further research.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
