China/Hong Kong Market Pulse: Decoding Expectations about the Two Sessions

Key Points:

• Unveiling anticipated economic strategies in China's Two Sessions.
• Premier Li Qiang and President Xi's insights pivotal for shaping 2024.
• Investor challenges: Balancing market interventions and long-term policy alignment.
• Navigating short-term market moves amid industry focus.
• Concerns prompt a call for investor agility during this pivotal economic juncture.

Introduction

China's economic landscape is currently undergoing a turbulent phase, marked by significant short positions and weakened investor sentiments. In response, the Chinese government is contemplating intervention to stabilize the equity market. This paper explores the dynamics of government intervention, drawing parallels with the 2015 intervention and examining the challenges and potential outcomes of the current situation. Furthermore, it delves into the upcoming Two Sessions, particularly the National People’s Congress (NPC), to gauge the government's economic strategies and policy directions.

The Two Sessions: Key Events of the Meetings

The Two Sessions refer to the concurrent annual meetings of the Chinese People’s Political Consultative Conference (CPPCC), beginning this year on March 4 and concluding on March 10, and the National People’s Congress (NPC), commencing on March 5 and expected to end on March 11. Investors will focus on Premier Li Qiang's government work report on March 5 at the NPC which is China’s unicameral legislature. President Xi’s concluding speech, anticipated on March 11, will also be a key focus.

Additionally, from March 6 onward, President Xi will meet with selective groups of provincial, industry, and other delegates at the NPC and the CPPCC. Last year, he held meetings with NPC delegates from Jiangsu province and met with CPPCC delegates from the China National Democratic Construction Association and the All-China Federation of Industry and Commerce. He addressed NPC delegates from the People’s Liberation Army and the People’s Armed Police. Investors will closely monitor the readout from these side meetings for any messages hinting at upcoming policy shifts or themes.

Furthermore, at the NPC, ministerial chiefs will hold press meetings to communicate the policy priorities of their ministerial portfolios for 2024. Notably, the chiefs of the Ministry of Finance and the National Development and Reform Commission are expected to hold press conferences.

Premier Li Qiang's Government Work Report: Key Expectations

The eagerly awaited government work report from Premier Li Qiang is set to offer insights into China's economic policies for 2024. While no major surprises are expected, the report is likely to align with the strategies outlined in the Central Economic Work Conference of last December. Emphasizing "high-quality development," the report may address fiscal and industrial policy escalation, along with prudent monetary policies, although significant stimulus measures are not anticipated.

Chinese economists anticipate that Li Qiang will announce a 2024 GDP growth target of around 5%, balancing near-term employment and confidence goals with long-term strategic initiatives for economic transformation and deleveraging. Overseas economists suggest a more realistic figure could be around 4.5% or 4.6%. A sub-5% target might confirm equity investors' concerns about growth not being the top priority for the Chinese leadership this year, while a higher-than-5% figure could raise expectations of additional stimulus measures, potentially boosting the equity market.

In terms of fiscal deficits, economists expect on-budget figures to align with the historical norm of 3%, with some advocating for a higher deficit in the range of 3.5%-3.8% for 2024. China is anticipated to increase fiscal support, involving RMB 1 trillion in special treasury bonds by the central government and RMB 4 trillion in special purpose bonds by local governments.

The Chinese leadership prioritizes the structural transformation of the economy and deleveraging. The recent imposition of a ban on new infrastructure investment in 12 highly indebted regions—Heilongjiang, Jilin, Liaoning, Tianjin, Qinghai, Gansu, Ningxia, Inner Mongolia, Guizhou, Yunnan, Guangxi, and Chongqing—underscores the government's commitment to stabilizing the economy without resorting to aggressive monetary easing and credit creation. The deliberate reduction of new infrastructure spending in these regions signifies a targeted approach. Despite facing challenging economic conditions, these regions, constituting 24% of the country’s population, 18% of GDP, and 26% of infrastructure investment, are expected to persist in deleveraging efforts.

In the property sector, state-owned asset management companies and enterprises are poised to take over projects along with the associated debts. The primary objective is to finalize the construction of incomplete projects from struggling property developers. The People’s Bank of China may find it necessary to provide funding through monetary printing, directing it to policy banks, which, in turn, would extend credits to asset management companies and state-owned enterprises involved in taking over property projects for completion. Although a developer bailout is not anticipated, investors will scrutinize Li Qiang's statements for insights into the restructuring intensity and the commitment to stabilize the property sector.

Doubling Down on Industrial Policies: China's Economic Agenda Amidst Absent Macroeconomic Shifts

President Xi's emphasis on "new productive forces" aligns with the government's industrial policy, prioritizing technological innovation and advancements. According to Chinese leadership and academia, the concept of "new productive forces" revolves around applying new technologies and the rapid emergence of new industries, production methods, and business models, ultimately constructing a new relationship of production in society within the Marxist taxonomy. In today’s world, this entails reliance on digitization, networking, and intelligent technologies, driven by core technological innovation and a focus on advanced manufacturing.

The government's persistent support for industries like advanced manufacturing, artificial intelligence, green energy, and quantum computing is expected to be prominently featured in Premier Li Qiang's report and President Xi's addresses to selected delegates. While structural reforms to enhance local governments' fiscal capacity might not take the spotlight, the report is likely to shed light on policies aimed at propelling new productive forces. The emphasis on innovation-driven growth aligns with China's strategic goal of reducing reliance on exports and imports.

Recent discussions within the Central Commission for Comprehensively Deepening Reform, chaired by President Xi, underscored reform as a top priority for China this year. The intention is to implement the reform blueprint outlined a decade ago in the Third Plenary Session of the 18th Central Committee. The renewed reference to the concept of "letting the market play a decisive role in resource allocation" is notable, considering its introduction in 2013. Additionally, China is in the process of drafting a bill to protect private enterprises' rights, especially ensuring their "equal treatment" compared to state-owned enterprises. Both developments would be very encouraging and have significant implications for the development trajectory of the Chinese economy. However, investors are rightly cautious and will await developments at the pending Third Plenary Session of the 20th Central Committee. Despite the expectation that it would have been held last November based on prior protocol, its announcement is still pending. Discussions and decisions on this long-term strategic development approach will be within the Party's domain rather than the state apparatus. Any structural changes arising from these discussions, if any at all, are expected to await the Third Plenary Session.

Assessing the Potential Impact of Recent Stabilization Measures on the Equity Market

The ongoing Two Sessions play a pivotal role in the government's communication of economic development strategies, drawing the attention of investors and market observers. It will have significant impacts on the efficacy of the recent government invention to stabilise the falling stock market.  

Government intervention in China's equity market has historically been a double-edged sword, with effectiveness hinging on the government's ability to convey a resolute commitment to market stability. The 2015 intervention injected RMB1.3 trillion, initially sparking a rebound but resulting in subsequent volatility, hitting a trough in Q1 2016 (Figure 1). Long-term restoration of investor confidence requires more than short-term government-driven buying; it necessitates sustained confidence in China's growth potential and simultaneous productivity increase. Frequent intervention will have damaging effects on the proper function of the equity market and distorted stock prices, which are essential signals for investment and economic activities.

In the current context, the 'National Team' reportedly purchased over RMB400 billion, but concerns linger about the sustainability of the rally it produced. Confidence in China's long-term growth potential is crucial, and today's economic challenges surpass those of 2015, given the declining growth rate and heightened geopolitical tensions. If the Two Sessions' outcome doesn't bring substantial changes to growth expectations for the Chinese economy in 2024, equity investors might test the resolve of Chinese authorities in stabilizing the market through intervention.

Investment Implications: Navigating the Uncertainty

Investors navigating the Chinese equity market must contend with both government interventions and broader economic challenges. The 'National Team' buying provides partial relief, especially for stocks of central state-owned enterprises and large-cap stocks. Short-term traders can find opportunities amid volatility, while longer-term investors may await signals from the Two Sessions and even more so the postponed Third Plenary Session for clearer economic strategies.

Technology and advanced manufacturing stocks, aligned with industrial policy tailwinds, present strategic opportunities despite cyclical swings. The government is very likely to double down its support to these industries while it may have less to offer in the aggregate demand management side. Examples of these opportunities include Xiaomi, Zhejiang Sanhua Intelligent Controls, Luxshare Precision, Shenzhen Inovance, along with relevant ETFs. Additionally, sectors focusing on energy security, green transformation, and food security remain attractive to investors. Net cash and strong balance sheet stocks capable of increasing dividends and buybacks, such as Alibaba, PDD, and JD.Com may also present attractive value propositions to long-term investors.

Conclusion

Navigating the complexities of the Chinese equity market requires a nuanced understanding of government interventions, economic challenges, and long-term policy directions. The Two Sessions offer a crucial insight into China's economic strategies, and Premier Li Qiang's government work report will be closely watched by investors. While short-term turbulence may follow government interventions, a sustainable bull market depends on enduring investor confidence in China's growth potential and productivity. Investors will benefit by remaining agile, balancing short-term trading opportunities with a strategic focus on industries aligned with China's industrial policies and long-term economic goals.