With consumer and business confidence still flagging in China, investors are looking to this week’s annual economic and political confabs for signs policymakers may rethink their stimulus approach.
Analysts caution the meetings may not do much to improve sentiment. They could even feed the recent pessimism that has left the
iShares MSCI China
exchange-traded fund down 15% over the past year.
The concurrent meetings of the country’s top advisory board and the National Party Congress—known as the “two-sessions”—start Monday and run about a week. Officials will highlight Beijing’s key priorities, the year’s GDP target and fiscal deficit target.
Just as U.S. Federal Reserve minutes are parsed for any changes in emphasis, investors will pour over comments coming out of these meetings, including Premier Li Qiang’s first government work report.
The meetings come at a critical time for Beijing. Confidence has suffered as the property sector enters its fourth year of contraction and investors are disappointed by the incremental approach authorities are taking to stimulus.
Analysts caution investors to keep the bar low.
Leland Miller, chief executive of independent research firm China Beige Book, pushed back against persistent expectations the market is just “a political gathering away from a sudden, meaningful pivot.”
“The Party has told us over and over that their goals are to manage the property sector slowdown and contain reckless credit expansion, while doing just enough to avoid a doom loop of confidence in markets and the broader economy,” Miller said.
TS Lombard Head of Research Rory Green is in a similar camp and expects a deficit target of 3.2% and growth target of around 5%, similar to last year’s growth of 5.2%.
“Anything below or significantly higher than my forecasts would be market moving. But downside surprises are more likely,” he said, noting investor expectations the confidence spiral will push Beijing to do more.
Green expects more stimulus, including vouchers, to encourage consumption of appliances and electric vehicles, as well as increased spending into strategic areas such as clean energy, semiconductors, and affordable housing.
The risk from that approach is the economy could feel worse on the ground. The stimulus could add to recent signs of overcapacity, translating into weak pricing pressure, revenue, and profit growth.
That could make deflationary pressures stick around, doing little to encourage investors to go out and spend, said Michael Hirson, 22V Research’s head of China research.
Rayliant Chief Investment Officer Jason Hsu said investors will parse speeches to tease out any shift between the recent focus on national security and quality growth, over economic growth alone.
“Last year, the thing that caught markets’ attention and was alarming to disappointing was the emphasis of national security,” Hsu said. A reversal would be “hugely positive,” but not expected.
Instead, Hsu is watching signs officials feel they have accomplished their goals from the crackdown on leverage in the property sector and are feeling an increased urgency to boost demand. It could help near-term sentiment if policymakers de-emphasize property concerns or pull back emphasis on industrial policy and productivity, and instead emphasize domestic spending and credit availability.
Already, Beijing’s efforts to stabilize markets by restricting short selling and encourage state-owned firms to buy is drawing some value managers, especially into larger-cap stocks, as they see a bottom nearing in the market.
But markets—and the economy—need more of a catalyst for a sustainable recovery.
Hirson isn’t so sure that will happen. While the second-tier of leadership has signaled more urgency in reviving the economy and the People’s Bank of China is stepping up its fight against deflation, messaging so far from Xi and top leadership is policy is on the right track.
Xi also has yet to call the Third Plenum, the twice-a-decade meeting that sets the economic agenda, only adding to wariness about the economy’s direction.
Beijing has gotten the message it needs to do fewer negative things, Hirson said.
“The problem is the scale of the pressures on the economy and the lack of market confidence means that is not enough and they actively need to do things that are positive and catch investors by surprise,” Hirson added.
Write to Reshma Kapadia at reshma.kapadia@barrons.com
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