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Decoding the policy messages from China’s National People’s Congress

The National People’s Congress (NPC), which took place from 5 to 11 March, saw the announcement of a target of 5.5% GDP growth YoY for this year. While many market players interpreted this as being too aggressive, we believe it was a reassuring message.  

Also announced was a flexible carbon reduction policy. This ran counter to the expectations of those who thought Beijing was withdrawing from its climate control commitment, but in our view, it was a realistic reaction to the prevailing, complicated macroeconomic and geopolitical environment.

A strong policy signal…

Beijing’s policy signal is clear: It is using all available monetary and fiscal tools to protect GDP growth and achieve the 5.5% target. Insufficient policy easing would risk undershooting this goal. Rather than seeing the target as too aggressive, we see it as a reassuring signal for more policy easing to deliver growth.

The NPC highlighted public investment in new infrastructure projects across a wide spectrum, including: 

  • 5G and artificial intelligence development
  • Data centres
  • Renewable energy
  • Logistics hubs and supply chains
  • Intercity rail and commuter rail development in major cities. 

This investment focus is a vindication of the recent change in reform tactics to favour ‘hard tech’ (i.e., the production of hardware and components that cater for the country’s strategic and high-tech development) over ‘soft tech’ (e-commerce development that caters for non-strategic consumption demand). The idea is to make China a tech powerhouse in the long run.1

…To meet growth challenges

China’s growth indeed faces many challenges as it is in the middle of reorienting its economic model to align with the new development of high-tech, high-value investment-driven growth while reducing debt and pursuing structural reform. This backdrop will likely create uncertainties for investors.

Rising commodity prices – especially those of oil – are adding to the growth headwinds. China imported some 3.5 billion barrels of crude oil in 2021. Today’s price is some USD 50 per barrel above last year’s average. This would mean a loss of about 1% of GDP on oil alone through the negative terms-of-trade impact (when higher import prices erode domestic purchasing power).2 

Copper, steel and wheat are further big-ticket import items for China, so the impact of total terms-of-trade losses on GDP growth could be large.

The energy shock could hurt global growth momentum, which then affects China’s exports. All this will hurt investor sentiment, on top of impending policy tightening by the main central banks. Moreover, Sino-US relations have remained tense, despite having stabilised somewhat under the Biden administration.

Lastly, China’s real-estate sector, which is estimated to account for 20-30% of GDP, has retrenched sharply since last year, with several large developers defaulting and home sales falling by some 40% in the first two months of this year.

Under these circumstances, a 5.5% target could be a strategy to help lift market expectations on growth. This would appear necessary given that ‘weakening expectations’ was one of the three downward pressures that the Central Economic Work Conference identified late last year as a drag on GDP growth, the other two being shrinking demand and supply disruptions.

Since economic outcomes are partly driven by expectations, Beijing’s hope is that shepherding those expectations towards a positive outlook may entice people to invest and consume.

Green policy

The NPC set no specific targets for energy control in 2022 and excluded renewable energy from its energy consumption quota. This has resulted in some media questioning whether China had changed its commitment to peak carbon and carbon intensity reduction.3 We believe that not to be the case.

Setting no energy targets shows policy flexibility to manage growth uncertainties in the current macroeconomic and international environment; it does not necessarily spell a withdrawal of Beijing’s carbon reduction commitment.

Rigid implementation of last year’s targets had caused major disruption in energy supply because economic output – and hence energy demand – recovered faster than had been targeted.

In our view, China remains firmly committed to hitting peak carbon by 2030 and net zero by 2060. It will pursue these targets flexibly.4 For example, China has shifted its policy on de-carbonisation to an ‘investment before retrenchment’ framework from the earlier ‘de-carbonisation by brute force’ approach.

Looking ahead, the carbon reduction campaign will likely ramp up investment in alternative energy sources before moving away from traditional energy sources, notably coal, to minimise any energy shortages.

Market observers should expect a gradual phasing-out of traditional energy, especially coal, in tandem with continued strong investment in new energy sources and power grids.

References

1 See “Chi on China: Regulatory Tightening Explained – A Strategic Policy Shift and the Outlook for China’s Private Sector”, 15 September 2021.

2 According to a recent estimate by the East Asia Institute, National University of Singapore, 7 March 2022.

3 China Shuns Energy Use Target to Focus on Securing Fuel Supply”, Bloomberg Green, Bloomberg, March 5, 2022.

4 See “Chi on China: When Structural Objectives Clash with Cyclical Forces”, 7 January 2022.

Disclaimer

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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