China’s 19th national congress: what should investors expect?

Hong Kong: With the Communist Party Congress starting in China on 18 October, attention has turned to the policies set to shape the country’s future direction for the next five years. Fidelity International considers what this means for investors.

“The 18th National Congress saw President Xi announce new initiatives so this time around, it’s more than likely that we will see the carrying forward of policies previously spoken about. Looking ahead, China’s government will remain determined to implement policies for better capital market development and economic reform,” comments Catherine Yeung, Investment Director, Fidelity International. “One of the biggest risks could be around property which remains as an anchor for China’s economy.”

Bryan Collins, Fixed Income Portfolio Manager, Fidelity International, adds: “We are all exposed to China either directly or indirectly. As investors, we are spoilt for choice in ways to express a view, from government bonds to small cap stocks offering growth not available in the rest of the world, but it’s important to understand some of challenges facing China and the different views on these. China is a large, complex and multi-faceted economy.”

So what are some of the challenges facing China for the next five years which could be on the agenda for China’s leadership?

Debt/deleveraging

Collins comments: “This is a known challenge for China and one where we are seeing proactive initiatives being taken to manage risks, including the development of domestic capital markets to improve the cost and allocation of capital. In addition, most of China’s debt is RMB denominated and within public sector institutions, meaning it is in the control of the government and thus reduces risks meaningfully. More interestingly, while deleveraging can impact growth, it typically represents ideal conditions for fixed income and credit investing.” Yeung adds: “We’ve already seen fiscal policies and SOE reform to address this issue, so making borrowers more accountable through the capital allocation structure will be key."

Manufacturing and trade:

Yeung comments: “One of the risks is that we see a downturn in global demand but as local manufacturers have turned their attention to the domestic market this will have less of an impact. The Made in China 2025 Manufacturing Strategy and Chinese companies becoming more innovative versus their global peers is a real occurrence - if we see a rapid increase in wages in the part of the labour market such as engineers, this could weigh on the growth path but it currently remains a small risk.” Collins adds: “China is rapidly moving up the value chain, from being a maker to innovator. The One Belt One Road initiative and primarily on-going urbanisation provides a structural support to consumption which will increasingly result in China making more in China, for China and its neighbours.”

Real estate and urbanisation:

Yeung comments: “The biggest risk over the next five years for China is the direction of the property segment and associated policies be it tightening or loosening. Property remains the anchor for China as most things are collateralised against property. We could see policies aimed at smoothing the property cycle or the introduction of tools that will be required for stabilisation. This could be in the form of tax mechanisms or a long-term rental programme. Whatever policies are introduced, they need to be timely and balanced. Too much or too soon could weigh on buyer psychology.”

Collins comments: “Property is a policy driven, cyclical sector and near-term we will see moderation. Investors can take comfort from the fact that urbanisation is approaching only 60% by 2020. China’s urban planning takes place on a grand scale and with the development of new cities, new districts and world class transport links these support the long-term benefits of a more sustainable consumer driven, urbanised economy.”

Conclusion

“When it comes to the Congress, we expect policy consistency,” comments Yeung. “It would be concerning if that wasn’t the case. The risk isn’t in continuing with reforms; it’s the direction of property that will be key for investors to watch over the next five years.”

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