How investible is China after Xi Jinping’s power grab? “Tighter state control of the Chinese economy warrants a higher risk premium.”
The start of his third term as the People’s Republic’s great leader brings an adjustment to uncertainty, especially now that Xi has clearly manifested himself as a bullish autocrat who does not tolerate dissent.
BlackRock sees an extended period of sharply lower growth. ING and abrdn are not pessimistic, but believe it is too early to draw firm conclusions. DWS said the resignation of two senior officials trusted by investors does not inspire confidence. Pictet fears that tensions will persist for a long time.
“We expect a conservative, inward-looking mindset to dominate Chinese policymaking in the coming years, with ongoing tensions over Taiwan and intense rivalry with the US over semiconductors,” said César Pérez Ruiz, chief investment officer at Pictet Wealth Management.
China stocks red
At the Communist Party’s five-year party congress last weekend in Beijing, Xi Jinping, “in the absence of a suitable successor”, consolidated his power indefinitely. Investors did not fail to express their displeasure on Monday. Chinese stock markets were sent to multi-year lows. On Tuesday, Chinese stocks were again in the red, although Wednesday saw a small rebound.
The 300 largest stocks on the Shanghai and Shenzen stock exchanges, as represented by the CSI 300 Index, lost nearly 3 per cent on Monday. The index thus fell past its March 2020 low. Shares of Tencent and Alibaba fell more than 11 per cent in value on Monday. Baidu, Google’s Chinese counterpart, lost more than 12 per cent.
The Hang Seng Index, which has already lost more than 40 per cent over the past year, went down 6.3 per cent during the trading session on Monday. This puts the index at a 25-year low against the S&P 500.
On Monday alone, foreign investors sold a net 17.9 billion yuan ($2.5 billion) worth of mainland shares during the trading session on Monday via trading links with the Hong Kong stock exchange, data from Bloomberg showed. A sure sign that international investors are in danger of leaving the promised boomtown.
Emphasis no longer on growth
Investors fear that China’s growth miracle may be dealt the final blow as Xi Jinping takes power for good after, back in 2018, clauses stipulating that the Communist Party leader can serve a maximum of two terms were skillfully eliminated from China’s constitution.
Blackrock sees a “continued shift in policy emphasis from GDP growth targets to objectives such as national security, stricter private sector supervision and income equality,” the asset manager said in response to the party congress where the emphasis on economic growth lost out to China’s security and wealth distribution.
Blackrock assumes that China is entering a phase of lower growth. Blackrock expects the shrinking labour force and structural production constraints - which effectively limit how much the Chinese economy can produce without causing inflation - to leave less room for the authorities to stimulate aggressively.
GDP data below target
China’s GDP grew above expectations by 3.9 per cent year-on-year, economic statistics released a week later than planned showed. However, that is well below the 5.5 per cent target for 2022, the lowest growth forecast in decades. On the other hand, industrial production rose 6.3 per cent, well above the market consensus of 4.5 per cent.
Tighter state control of the Chinese economy warrants a higher risk premium than in the past, partly reflected in a nine per cent fall in Hong Kong-listed Chinese stocks since the start of the congress. “We remain tactically neutral on Chinese equities and bonds,” said the world’s largest asset manager, which actually increased the strategic weighting to China in the summer.
Officials trusted by investors stepped down
Perhaps more problematic than Xi’s autocratic rule, is that Communist Party’s party leadership now is shaped purely by loyalists.
Premier Li Keqiang, and Vice Premier Liu He, the de facto directors of the Central Committee for Financial and Economic Affairs, the highest body for coordinating China’s economy known as CFEA - this weekend stepped down. “Li Keqiang enjoyed the confidence of investors,” said Elke Speidel-Walz, chief economist at DWS. “That could have considerable consequences for investors.”
“Deputy Prime Minister Liu He has great influence on economic policy because he chairs the CFEA,” said Speidel-Walz. The CFEA is the main governing body with influence over China’s economy, and according to Speidel-Walz, “the working group with the most power within the party”.
Liu He also chaired the Financial Stability Committee and oversaw the cooperation of regulators. He also turned the knobs in the trade war with the US, a thorny issue in the discussion around investment opportunities in the country.
ING not adjusting weightings
ING remains invested in China, both directly and indirectly, despite all the political developments and uncertainties. ING sees no catalyst to increase our current neutral weighting for Chinese equities in the investment strategies, despite price declines and rising interest rates worldwide, CIO Simon Wiersma told Investment Officer.
For ING, the current low valuation of Chinese equities is a key reason why the weighting of Chinese equities will not be lowered further at the moment.
Wiersma does not share Blackrock’s view on the Chinese central bank’s reduced room for manoeuvre. “Indeed, despite all the risks mentioned, there is also a reasonable chance that the Chinese governments, together with the Chinese central bank, will announce new stimulus measures to boost the ailing economy. That room is there because of China’s relatively low inflation. That would be welcomed by investors,” said Wiersma. He is not the only one who is still hopeful.
‘The economic balance remains intact’
Alec Jin, investment director Asian equities at abrdn, is also optimistic and looks back on the party conference with reassurance. Jin believes the pressure on the economy from the government will ease in the short term. “The economic balance between state-owned and private companies will also be maintained,” Jin said.
In his speech, Xi called for “more self-reliance and strength in science and technology”, which Jin said indicates an economic policy mix in which economy and growth still come first, but in which security, equality and self-sufficiency have been upgraded.
In this context, we believe the pursuit of self-sufficiency and localisation is becoming increasingly important,” Jin said. “This is likely to accelerate investment in areas such as renewable energy and domestic semiconductors.”
In the short term, however, abdrn is cautious. Analysts at the UK asset manager are monitoring developments regarding the latest US export ban on Chinese semiconductors which, according to Jin, could impact the semiconductor supply chain. “We want more clarity on the latest rules and their application and interpretation,” Jin said.