Summary: China’s political meetings in Q4 of 2023 reveal a lack of urgency in prioritising counter-cyclical initiatives. The direction of development strategies hinges on the Q1 2024 Third Plenum. Technology, advanced manufacturing, energy, and green metals may provide fertile ground for medium-term growth despite challenges and uncertainty.
Decoding Q1: Insights from recent political meetings
The Central Financial Work Conference (CFWC), Politburo meeting, and Central Economic Work Conference (CEWC) convened in Q4 of 2023 to offer a glimpse into China’s future policy landscape.
Notably, the CFWC’s official communication sidestepped discussions on deleveraging, opting instead to address risks within the property sector. However, a less accommodating message was sent in an article in Qiushi, a Party mouthpiece, underscoring President Xi’s directives at the conference to adhere to Marxist political economy theories for reforming the financial system. Intriguingly, the article, marked by 23 references to “risks”, conspicuously avoided mentioning resolving property sector risks or local government debts. The overarching theme stressed Party control over the financial system.
In the subsequent CEWC, President Xi prioritised “seeking progress while ensuring stability” and “high-quality development”, which are codes that downplay economic growth. Among the nine 2024 priorities, “developing new industries and business models through technological innovation” takes precedence. These priorities lack urgency for counter-cyclical policies. Echoing the readout from the latest Politburo meeting, the CEWC hinted at fiscal and industrial policy escalation, with stable monetary policies, side-lining short-term growth stimulation.
To avert China’s growth decline, imperative measures include productivity enhancement, and restoring entrepreneurial confidence. In addition, property sector debts will need to be restructured and projects taken over. The critical period of Q1 2024 will serve as a litmus test. Post-Third Plenum, a clearer understanding of China’s economic policies and strategic directions will emerge. Presently, navigating through the macroeconomic landscape involves a degree of uncertainty.
Don’t predict, do prepare
It’s time to remain humble, cautious and flexible as market conditions evolve. We’re not able to see the future through a fictional gap in the curtain as in John Buchan’s classic. This doesn’t mean we should disregard the macro contextual conditions or be led by the narratives of the day. As Howard Marks, founder of Oaktree Capital Management, emphasises: “We can’t predict, but we can prepare. An awareness of the economic, credit, and sentiment cycles can help with investment.”
Sowing seeds in fertile ground
- Technology and advanced manufacturing: Unless we hear something dramatically different from the Third Plenum, enhancing productivity and technology self-reliance will remain the two structural themes of China’s long-term development strategy. These are unlikely to wither despite the cyclical swings of the economy. The technology and advanced manufacturing companies that produce tangible products tend to benefit from favourable industrial policies. Examples include Xiaomi, Zhejiang Sanhua Intelligent Controls, Luxshare Precision, Shenzhen Inovance, and ETFs that focus on these industries.
- Energy and green metals: Energy security, green transformation, and food security are enduring themes that will continue to receive policy support. Companies such as CNOOC, PetroChina, Zijin Mining, and Ganfeng Lithium align with these themes.
- Internet and Consumer Discretionary: While categories 1 and 2 above provide grounds for gradually sowing seeds to participate in secular trends and ride the industrial policy tailwinds, trading opportunities may arise in Internet stocks and consumer discretionary counters. This option is for more nimble traders who have a view on the momentum of the cyclical recovery of the Chinese economy. Alternatively, these stocks can serve as instruments for trading based on reading the tea leaves during Q1 in anticipation of the Third Plenum and the Two-Session meetings, as well as responses to the outcome of those meetings.
Note: Company’s mentioned are for illustration and inspiration purposes only, and not for investment advice.
