China Back on Track?
With Beijing focused on striking a balance between stable growth and reforms to
ensure financial stability,1 perhaps it's time again to take a closer look at
opportunities in the world's second largest economy
If early economic and market indicators are anything to go by, then 2017 looks to be a positive year for China.
On the sidelines of China's National People's Congress (NPC) annual political gathering held in early March 2017, the country's National Bureau of Statistics chief Ning Jizhe announced that China's industrial output in January-February grew by more than 6% while the service sector rose more than 8%2. Meanwhile, the MSCI China Index jumped 14% in the first quarter of 2017, which was its strongest start since 2006 and one of its best performances versus world equities since the global financial crisis3.
As the NPC concluded, Beijing's
position for 2017 is clear: to balance the delivery of near-term growth with the furthering of structural reforms4.
As such, HSBC Global Asset Management expects China to
maintain a prudent and neutral monetary policy stance with proactive fiscal policy, while striking a balance between growth and structural reforms as well as financial stability for the remainder of 20171.
With stability a key theme for 2017, Beijing made very modest changes to
growth and policy targets to minimise shocks to the economy4. The GDP growth target for 2017 has been set at "around 6.5% or higher if possible in practice" versus 6.5% - 7.0% in 20161. This implies that 6.5% will likely be the lower bound, with maintaining stable growth to support job creation and ensuring social stability remaining priorities in a year of political transition1.
The government increased the new urban job creation target
from 10 million to 11 million, largely reflecting the change in economic structure with an increasing share in the labour intensive service sector, despite slower headline growth1.
Beijing reaffirmed their neutral and prudent stance on monetary policy
with lower M2 money supply and total social financing targets1. According to HSBC Global Asset Management, the lower targets suggest broadly stable liquidity conditions and credit policy, but reflect policy focus on financial deleveraging and selective tightening in areas such as banks' off-balance sheet business and credit to property in selected cities1.
On the fiscal front, HSBC Global Asset Management is of the opinion that
we should be seeing more expansionary fiscal policy than the headline suggests1. In addition to some flexibility for Beijing to deploy fiscal savings, the government also has room to mobilise other off-budget channels1.
Infrastructure spending will be a key growth driver for the Chinese economy
in 1H 2017 with a lot of flexibility to allocate the fiscal budget to this area1. In addition, HSBC Global Asset Management expects a faster take up in the Public-Private Partnership programme this year to conduct infrastructure projects1. As a result of strong infrastructure investment growth, there has been a significant pick-up in machinery and commodities demand since 2H 2016 - a positive for commodities and infrastructure-related sectors1.
To Open
Up China
In terms of reforms, China is
treading a similar line as 2016.
The focus will be on reducing overcapacity, deleveraging the corporate
sector and restructuring state-owned enterprises (SOE)4.
Beijing's supply side reforms to reduce overcapacity that began end 2015
continue to focus on two sectors - steel and coal1. This is the reason HSBC Global Asset Management has been positive on the commodities sector since early 20161. A surprising outcome from the NPC meeting was efforts to reduce overcapacity in the aluminium sector as well1. The Chinese government targets to close down 30% of capacity in a few provinces by the fourth quarter of 2017, which should provide an additional boost for commodity prices1. HSBC Global Asset Management believes that eliminating overcapacity in the market will induce improved returns in the private sector and therefore stimulate investment demand in the private sector1.
Within the financial market, the Chinese government highlighted four areas of
potential risks - bond defaults, non-performing loans, shadow banking and internet financing - although none of these are new4.
The Chinese government placed emphasis on strengthening reform in
the financial regulatory system and HSBC Global Asset Management believes that more coordinated approach to financial regulation will be a positive development for financial stability in China in general1.
As part of the financial reforms, HSBC Global Asset Management expects
Beijing to continue opening up China's financial markets and attract foreign investment inflows into both equities and bonds1. An encouraging sign is global index providers such as Bloomberg-Barclays and Citi including onshore Chinese bonds into some of their new global bond indices1. HSBC Global Asset Management opines these are positive steps towards an eventual full index inclusion of Chinese bonds1.
The "Belt and Road Initiative" will also remain a focus of China's future
opening up1. Chinese companies will actively participate in overseas infrastructure investment, while China will improve the domestic business environment to attract FDI, further opening up its services, manufacturing and mining sectors to foreign participation1. The country will also encourage foreign companies to be listed and issue bonds in China and allow foreign companies to take part in national science and technology projects1.
China's focus on stable growth
and the country's reform efforts could provide the backdrop for potential opportunities in the market.
For example, Franklin Templeton Investments commented in late March
2017 that it was optimistic about China after the economy showed stability over the previous few months5.
"We see more opportunities in emerging markets in 2017 despite
some uncertainties. With numerous favourable factors, including the stabilisation of the Chinese economy, we believe that there is still room for emerging markets to further catch up," commented Stephen Dover, chief investment officer of Templeton Emerging Markets in late March 20175.
Commenting on MSCI China Index's great start to 2017, Head of Axa
Framlington Asia in Hong Kong, Mark Tinker said that there is increasing evidence that the rally isn't just another false start3. "There's stability and corporate fundamentals are good. This rally is playing out in a non-hysterical way. If you're a global investor holding expensive US stocks and fearing political risk in Europe, you do start to wonder, why not own China? Nobody's thinking that the economy or the currency are going to collapse anymore3."
Bullish on
Indeed, HSBC Global Asset
Management believes that there are opportunities in China's equity markets1.
With China's onshore market, HSBC Global Asset Management feels
improving fundamentals have lent some support to the market1. With earnings bottoming out, HSBC Global Asset Management is finding opportunities in selective areas; cyclical plays that are positioned to benefit from a potential reflationary theme over the medium term as well as selective growth stocks with good earnings growth potentials and inexpensive valuations1.
As for the offshore Hong Kong market, HSBC Global Asset Management is
positive on "new economy" sectors including IT and healthcare, which should benefit from China's continued economic development and ongoing rebalancing towards consumption-led growth1. HSBS Global Asset Management is also positive on materials, which should see strong earnings growth on the back of supply-side reform and rising prices1. Within financials, HSBC Global Asset Management is positive on insurance names, which should benefit from rising rates but remain underweight on banks and real estate1.
Chinese bonds
going global
The most exciting news from China's bond market in 2017 has been
Chinese Premier Li Keqiang's announcement that China will launch Bond Connect this year allowing foreign investors to buy onshore Chinese bonds through Hong Kong in another positive development to open up its markets1.
Beijing has always wanted foreign inflows to help stabilise the country's
financial markets6. China has the third largest overall bond market in the world at US$9 trillion but foreign investors own just 1.2% of that total due to government restrictions and the bonds' exclusion from global benchmarks6. HSBC Global Asset Management believes Bond Connect will help further open up the onshore bond markets and increase accessibility to foreign retail investors, as well as satisfying an additional requirement for index inclusion1.
"Further developing hedging tools would help spur investor participation
and push the market closer toward broad index inclusion," Fidelity International Hong Kong's fixed-income portfolio manager Bryan Collins commented to Bloomberg in March 20177. "I see great investment opportunities as the Chinese bond market is rapidly growing and the yields are attractive7."
Meanwhile, offshore Chinese bonds continued to deliver steady returns in
March 2017 and HSBC Global Asset Management continues to see value in offshore Renminbi bonds, which offer attractive yields with low duration1.
as it goes
for the
China's FX reserves rose for the
first time in eight months in February 2017, signalling an improved capital flow situation thanks to a combination of the effectiveness of recent administrative measures on capital outflows and improved onshore FX market sentiment1.
This in turn may have encouraged more exporters to convert
their FX proceeds in to Renminbi1.
Looking ahead, HSBC Global Asset Management expects Beijing to continue market-oriented FX reforms and maintain
the Renminbi's stable position in the global monetary system while likely maintaining a stable trade-weighted FX policy1. While the Renminbi outlook will continue to depend on the US Dollar trend and capital flows, HSBC Global Asset Management expects the Renminbi to remain relatively stable amid tighter regulatory oversight on capital outflows and enhanced policy efforts to encourage foreign direct and portfolio investments1.
Overall, HSBC Global Asset Management believes that a cyclical growth recovery and policy focus on financial
stability ahead of the Communist Party Congress in October or November 2017 would support the Renminbi1.
The developments in China's economy in 2017 and expected stable growth moving forward could provide potential
investment opportunities. To find out how you could possibly take advantage of these opportunities via a selection of investment funds that HSBC offers with exposure to China, speak to your Relationship Manager today.
1HSBC Global Asset Management, China insights: Monthly update on Chinese markets, March 2017.2South China Morning Post, Two key indicators point to growing stability in China's economy, 12 March 2017.3Bloomberg, China stocks have best start to year since 2006, 29 March 2017.4South China Morning Post, NPC signals Beijing is aiming for stable but more balanced growth, 15 March 2017.5South China Morning Post, 2017 is shaping up as a good year for China's equity markets, and more positive news is in store, analysts say, 31 March, Chinese bonds could trigger 'tremendous' demand from Wall Street, 22 March 2017.7Bloomberg, China moves to make $9 trillion domestic bond market global, 13 March 2017.