China: abrdn’s takeaways from the annual legislative meeting, the National People’s Congress (NPC)

This week, China held its annual legislative meeting, the National People’s Congress (NPC), which saw close to 3,000 delegates from the political, business, and cultural elite gather in Beijing. This key session usually outlines the government’s key economic policy priorities and targets for the year. 

Nicholas Yeo, Head of China Equities, abrdn, comments.

What are the key takeaways?

The meeting struck a supportive policy tone, although there were no major policy changes, but a continuation of incremental support:

• We view the 5% growth target as sending the right signal, but overall, our house view is for 4.5%,
• The fiscal stimulus is positive, with policy easing continuing across a number of dimensions, but as it stands, we don’t think the issuance of treasury bonds represents a big bang style stimulus,
• Increasingly policy makers seem concerned about the stock market, and Chinese stocks are offering significant value and margin for error.

What are the implications for our China strategies /positioning?

• Although there were no big policy changes to boost growth, the authorities seem to be putting a ‘floor’ to the property downturn. This should bode well for confidence and as a result could lead to a pick-up in consumption. 
• The “trade-in of old for new” trade-in program to support consumption could prove positive for consumer holdings. A white goods manufacturer we hold includes Midea Group. 
• China’s continued focus and support for key strategic areas, such the green transition, renewable energy, and advanced manufacturing, plays to our five portfolio themes.  

Overview of announcements

1. Growth target of around 5% and inflation target at 3%

The GDP growth target for 2024 was set at around 5%, while inflation was set at 3%. To achieve this, policymakers have prepared a fiscal budget at 3.0% of GDP (or RMB 4.06 trillion). The government will also issue RMB1 trillion of ultra-long special treasury bonds to fund major strategic projects. This modest macro support suggests that the authorities continue to balance fiscal discipline with sustainable growth support.

2. Continued restructuring of LGFVs

Aside from the special bond issue that will mitigate debt repayment risks at the local government level, policymakers emphasised the closer monitoring of local government debt, tighter control of the increase of new implicit debt, and restructuring of existing local government financing vehicles (LGFVs). 

3. Accommodative but prudent monetary policy

Monetary policy will continue to be flexible and appropriate, precise and effective, reflected in reasonably ample liquidity and lower funding costs. This would suggest measured cuts to the policy rate and the reserve requirement ratio and the use of liquidity facilities to ensure robust credit growth over 2024. 

4. Sustained support for property sector 

Property remained a focus area, with more support for affordable housing and urban village renovation/renewal, targeted and differentiated support for different cities, more property debt restructuring and equal credit access for non-SOE developers. The market is expecting further easing of home purchase curbs and downpayment restrictions, as well as reductions in mortgage rates ahead.

5. Progress towards economic transition

Building modern industries and fostering new growth drivers are the key focus. This would include enhancing the resilience of key supply chains, upgrading manufacturing sectors, developing the modern services sector, and facilitating the transformation of traditional industries. The new economy gets a boost, with further support for electric vehicles and cutting-edge technologies like hydrogen, innovative drugs and new materials. The government is also looking at digitisation and AI, increasing R&D spending and innovation and the build-up of digital infrastructure. 

6. Consumption incentives: “Old for new” trade-in programme

Household consumption will get more support from the broader boosting of income and employment growth, although there were no details around the “old for new” consumer goods “trade in” policy for big ticket items such as new-energy vehicles, consumer electronics and appliances. 

What about the outlook for China post-NPC?

• Our outlook for the Chinese market remains unchanged. After sentiment towards the Chinese market has spiralled downwards over the last year, we view that a disconnect has emerged between sentiment, as indicated by valuations and headlines, and what we see on the ground, and hear firsthand from our companies. 
• At some point, pessimism for China will peak, and is currently the cheapest of all the world’s major stock markets. Cheap compared to history, and at historic low when compared to the US or India.
• In the longer term, we expect innovation to underpin growth in crucial sectors represented in our five portfolio themes: aspiration, digitalisation, green, health, and wealth. The types of jobs in these sectors will become more sophisticated over the coming years, likely supporting the long-term growth of the Chinese middle class. This was also echoed in the recent NPC where the Chinese authorities seek to foster new growth drivers. 
• Over our thirty years of investing in China, we have found that the best way to navigate market ups and downs is to buy and hold long-term compounders. These are the companies that can emerge from downturns in stronger positions.