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What does China’s 5th Plenum tell us, from an investment perspective?

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Chi LO
 

As reiterated at the 5th Plenum, domestic demand growth, import substitution and technological self-sufficiency will be the main factors driving investment decisions and opportunities in China in coming years. The envisaged green economy and managing climate change are other focus areas.

Investors can expect more Chinese green bond issues. Investment themes will include environmental protection and spending on technological innovation, healthcare, water conservation and renewable energy.

With a development vision through 2035, there are crucial strategic investment implications:

Growth target

The Plenum communique did not set any growth target for the next five years, probably because of the increasing challenges to growth and geopolitical volatility. At a later date, Beijing may set a 5.5% to 6.5% range for medium-term growth to anchor macroeconomic policy in the new five-year plan.

Industrial migration and hence reverse urbanisation to the inner parts of the country to spread income and consumption growth more evenly will be key trends to monitor when investing in the domestic-oriented sectors.

Dual circulation

This has been reiterated as the strategic policy direction for the medium-term:

  • Emphasising internal circulation (i.e. domestic demand)
  • Continuing the push for (but not relying on) external circulation by opening up the domestic system, and through the Belt & Road Initiative and renminbi internationalisation.

Domestically, the emphasis is on high-end manufacturing and technology, and redirecting Chinese consumers’ overseas spending to the domestic market.

  • This should be positive for domestic retailers and companies catering to Chinese buyers who previously bought items abroad.
  • It is negative for those companies and countries whose retail businesses depend on Chinese tourists.

As China steps up its efforts to substitute imports and strengthen self-sufficiency, domestic brands in the technological and financial innovation sectors, industrial consolidation and consumer-upgrading will be the long-term themes driving should the equity market.

  • This argues for cutting positions in companies with a high overseas exposure, such as consumer electronics companies.
  • It would make sense to increase the allocation to companies and sectors that are related to state investment in the priority sectors on the policy agenda such as aerospace, defence and domestic high-tech industries.

Technology innovation and self-sufficiency

Industrial consolidation & upgrading and innovation & technological independence are set to speed up and become a strategic pillar for future development.

Expect higher R&D spending by the government in the next 5-10 years, with a focus on:

  • AI
  • Cloud computing
  • 5G networks
  • Digitisation (including, but not limited to a digital renminbi)
  • Big data

Green economy and climate change

The Plenum called for faster carbon emissions control by 2035, setting higher standards for environmental protection and pollution. This includes a higher share of non-fossil energy in overall energy consumption and reducing the energy use per unit of GDP and CO2 and SO2 emissions.

This should be positive for investment in related equipment and services.

Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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