On Tuesday the eight-day People’s Congress in China, an annual parliamentary gathering drawing thousands of delegates from across the nation, kicked off. Premier Li Qiang will address the congress, detailing targets for economic growth and military spending. This year holds added significance as it marks the 75th anniversary of the People’s Republic, prompting a reflection on its achievements.
Amidst the agenda, attention will be devoted to the real estate crisis, the under-utilization causing deflation in the Chinese economy, and the escalating resistance from the United States and Europe regarding the export of electric cars. To counter the under-spending challenge, there’s a call for increased government expenditure, but President Xi Jinping appears to have different priorities. While the market anticipates decisive action from the Chinese government, Xi is more focused on reducing dependence on foreign countries, particularly in high technology.
Over two decades since China joined the World Trade Organization, initial hopes for political reforms have given way to tensions, especially with the United States. China’s Belt and Road Initiative, spanning 140 countries in Africa, Latin America, and Asia, signifies a strategic move to reduce reliance on the U.S. market. In 2023, China achieved a real economic growth rate of 5.2%, viewed by some as disappointing given the struggles in the real estate sector.
Despite economic challenges, China’s stringent regulations have made it a more favorable destination for bond investors rather than equity investors. The People’s Bank of China follows a path akin to the Bundesbank, prioritizing the prevention of inflation to avert potential social unrest.
The contrast in policy approaches between China and the United States, reminiscent of the Bundesbank-Federal Reserve dynamics in the 1970s, is evident. China’s focus on preventing inflation has led to its bond market being the best-performing globally over the past decade. The People’s Congress may be a tipping point for Chinese equities, with structural reforms needed for a sustainable recovery.
Fearing Japanese economic conditions, China avoids direct consumption subsidies but may indirectly boost consumption through various measures. Hukou reforms could enhance labor mobility and increase the purchasing power of rural migrants. While concerns about debt sustainability persist, China’s vast assets offset its debt, offering potential solutions like selling state-owned assets.
The key question remains whether the announced measures during the People’s Congress can sustain the recent rally in Chinese equities. The possibility of foreign investors, particularly from Latin America, Africa, and Asia, entering the Chinese market exists, but a structural recovery may require Beijing to relinquish control in certain areas—an aspect currently absent from the politburo’s discourse.
Han Dieperink, Chief Investment Strategist at Auréus Asset Management, shares these insights, drawing from his extensive experience, including roles at Rabobank and Schretlen & Co.