China’s Politburo (the 24 senior members of the Party leadership) held its quarterly meeting on the economy on Friday. As expected, the meeting signaled that Beijing is not prepared to significantly loosen policy or unveil new stimulus measures.
We had noted after last week’s Q1 GDP data that the subdued rebound underway is “good enough” for Beijing (see our write up HERE). To be sure, China’s leadership would welcome stronger growth, but is also intent to guard against financial risks and overdo stimulus.
That stance was confirmed by the readout of the Politburo meeting. It noted that expanding domestic demand is “key” to the recovery but outlined little in the way of new policies to get there. It implied that fiscal and monetary policy will remain supportive but not loosen further. There was a strong focus on risk prevention, including local government debt risks, which will limit the extent of additional public investment. Promoting consumption remains an explicit policy goal but without concrete measures of support.
The section on property policies led with the familiar refrain of “housing is for living in, not for speculation,” and rehashed the current policy stance: flexibility for cities to keep demand-side policies loose, a focus on completed stalled housing projects, support for affordable housing, and continued steps to a new (and implicitly more conservative) model for real estate development.
The bottom-line for investors is that, given limited policy support from Beijing, the recovery will remain gradual and driven largely by the boost to services and consumption from reopening. A new round of stimulus measures – should it be necessary to support the recovery – would only come closer to Q3.
Xi Jinping’s priority is not growth but instead industrial policy, underscored by the fact that this area comes first in the readout in terms of policy prescriptions – a tip-off to officials throughout the system as to where they should direct their primary focus. The directive in the readout is to accelerate self-reliance in science and technology – shoring up China’s weak points in sectors such as semiconductors – while extending China’s technological strengths, particularly in the NEV sector, which will benefit from increased investment in charging infrastructure and energy storage.
The readout also said that China must “attach importance to the development of general artificial intelligence, create an innovative ecology, and pay attention to preventing risks.” This is an expression of the balance to generative AI innovation that Beijing is taking in the wake of ChatGPT, seeking to avoid being left behind by the US while adopting a cautious regulatory framework. (Beijing issued draft measures to regulate generative AI technologies on April 11; see HERE for a translation by Stanford University’s DigiChina project).
The readout pledges to “promote the standardized and healthy development of platform companies and encourage leading platform companies to explore and innovate.” This reaffirms our view that the risk of new crackdowns on platform companies remains low this year, but platform companies will continue to operate in an environment of tight regulatory scrutiny and pressure to back Xi’s innovation priorities.
What it means for Chinese equities:
Chinese equity indices have been largely stagnant since the initial “reopening trade”: since end-January, the CSI 300 index is down -3%. We see three main factors at work:
- The subdued economic recovery. While headline growth is strong, demand is only gradually firming up. It will take time for the recovery to translate to a broad-based rebound in earnings for Chinese companies.
- Lack of additional stimulus, as discussed above.
- Domestic politics and geopolitical tensions. Investors question the strength of Xi’s commitment to improving the environment for private firms and worry about persistently high US-China tensions. We expect US-China engagement to pick up in coming months, as ill will over the balloon episode subsides and in preparation for the APEC Leaders’ Summit, which the US will host in San Francisco in November. But anything resembling a “reset” of the relationship and major reduction in tensions is unlikely. There remains deep skepticism on both sides that the bilateral relationship holds any promise, and thus little incentive to make concessions on sensitive issues ranging from technology policy to Taiwan.
None of the three factors above are likely to shift radically in the near term. This is not to say that investors should avoid Chinese equities, just that we don’t see catalysts on the horizon that would lead to a major rerating of shares.
