Innovation will underpin growth in certain Chinese sectors over the long term, says Nicholas Yeo, head of China equities at Abrdn.
Additionally, the types of jobs in these sectors – aspiration, digitalisation, green, health, and wealth – will become more sophisticated over the coming years, likely supporting the long-term growth of the Chinese middle class.
Yeo’s comments, in a note published by Abrdn, follow the discussions at China’s annual legislative meeting of the National People’s Congress earlier this week, which saw close to 3,000 delegates from the political, business, and cultural elite gather in Beijing and typically outlines the government’s key economic policy priorities and targets for the year.
An overview of the announcements included:
- A growth target of around 5 per cent and inflation target at 3 per cent.
- Continued restructuring of local government financing vehicles (LGFVs).
- 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.
- Sustained support for property sector.
- 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 government is also looking at digitisation and artificial intelligence, increasing research and development spending and innovation, and the build-up of digital infrastructure.
- Consumption incentives: “old for new” trade-in programme. Household consumption will get more support from the broader boosting of income and employment growth.
In his note, Yeo said: “The meeting struck a supportive policy tone, although there were no major policy changes, but a continuation of incremental support.
“We view the 5 per cent growth target as sending the right signal, but overall our house view is for 4.5 per cent. 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 policymakers seem concerned about the stock market, and Chinese stocks are offering significant value and margin for error.”
Yeo went on to add that although there were no big policy changes to boost growth, the authorities seem to be putting a ‘floor’ to the property downturn, which “should bode well for confidence and as a result could lead to a pick-up in consumption”.
Concerning the outlook for China, Yeo said after sentiment towards the Chinese market had spiralled downwards over the last year, a disconnect had emerged between sentiment, as indicated by valuations and headlines, and “what we see on the ground, and hear firsthand from our companies”.
He added: “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.
"Over our 30 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."
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