Outcomes of China’s biggest leaders’ talk

China announced a target on YoY growth rate of 6%-6.5%, with the GDP growth projection trimmed from 6.5% in 2018


China’s 13th Chinese People’s Political Consultative Conference (CPPCC), which recently concluded, was the main event on many investors’ radar in early March. The CPPCC came amid uncertainty over trade issues compounded by doubts over China’s future growth.

Many cardinal issues were addressed by China’s leaders and the curtains were pulled back to unveil fresh policy initiatives.

The Chinese government announced a target on year-on-year (YoY) growth rate of 6% to 6.5% at the meeting for the year, with the GDP growth target trimmed from 6.5% in 2018.

While lower, the new growth target was within economists’ expectations and remained in line with the median YoY growth rate of 6.2%.

In our assessment, YoY growth will come in at around 6% to 6.4%.

Investors need not worry about a sudden breakdown in China’s growth engine or the possibility of growth falling off the cliff.

The current and new policy measures announced will cushion any fall in economic growth, but the impact from the measures will likely come through in economic data in the second half of the year (2H19).

Should GDP growth plunge below 6% — a scenario which is not too probable at the current juncture — we opine there will be implementation of aggressive macroeconomic policies.

In particular, the valve for monetary policies will be further turned and we might see additional rate cuts and money supply.

Once again, the trinity of “proactive fiscal policy”, “prudent monetary policy” and “cutting taxes and fees” was highlighted in China’s 13th CPPCC.

The Chinese government has unveiled a flurry of potential stimulus in 2019, albeit relatively modest compared to stimulus in the past.

The government presented tax cuts to a multitude of core industries alongside further special bond issuance, which collectively will be funded by the modest increase in deficit-to-GDP ratio to 2.8%.

We expect this ratio to remain below 3%, and we do not deem the increase in deficit-to-GDP ratio to 2.8% to be a cause for concern as it
is unlikely to post any risk to the economy, even if GDP growth slows to 6%.

Additionally, the Chinese government plans to spend 800 billion yuan (RM488 billion) on railway construction, and 1.8 trillion yuan on road construction and waterway projects.

The multiplier effect from infrastructure projects of that magnitude should help bolster domestic demand once the impact trickles down the value chain.

Assuming these projects are implemented soon, the economic impact will be widespread and possibly be reflected in economic data by late 2019.     

To alleviate the immense pressure on government budgets at all levels, the central government will increase the contributions from state-owned enterprises and financial institutions under its control, while reducing its various key expenses.

In terms of monetary policy, the Chinese government is emphasising a prudent and cautious approach to policymaking.

The emphasis now lies with the private sector — in particular, small and medium enterprises, which collectively have faced significant hurdles in obtaining financing.

Overall, the debilitating effects of the recent liquidity squeeze, rising borrowing costs and excessive tariffs have hit the private sector hard, especially on export-dependent companies.

China’s private sector accounts for around 60% of GDP, as well as 50% of tax revenue, and a further slowdown will certainly be a handbrake on the nation’s growth.

A barrage of policies have been launched to help the private sector slash costs and acquire funding, and at the 13th CPPCC, further monetary initiatives were announced to support these objectives.

Chinese companies, on aggregate, were feeling more optimistic of securing financing in the fourth quarter of 2018.

Consequently, this underpinned the rally in business confidence, as seen from the CKGSB Business Confidence Index.

At current juncture, businesses are more optimistic about China’s macroeconomic environment which may translate into potentially greater capital expenditure, labour expansion and production output.

These positive concoctions of factors are vital in stimulating China’s domestic growth moving forward.     

On China’s ongoing deleveraging efforts, we believe the private sector will likely remain squeezed for some time.

Nonetheless, the remedies discussed above will prevent a sharp slowdown.

Overall, the current domestic and external environment might encourage further easing of monetary policy.

With adequate monetary firepower left in the tank, we believe there is room for one to two more reserve requirement ratio cuts for banks and the monetary space for lower interest rates moving forward.

The latter will be more probable, if growth slows below the 6% YoY target.

Despite a more muted economic growth rate, we do not expect earnings growth of China’s onshore market (as gauged by the CSI 300 Index) to fall sharply.

In fact, with China turning on the stimulus tap, we anticipate earnings growth to start re-accelerating in
late 2019.

In the short term, the tax cut windfall and the government’s infrastructure spending will provide a swift boost to earnings of companies in selected sectors. On a longer term, China’s efforts to boost domestic demand should induce a more robust sales environment, which should bolster top-line growth for domestically exposed sectors.

Greater funding and lower borrowing costs through monetary stimulus will also support corporate earnings, albeit in the longer term after accounting for policy lags and time for the impact to pass through.     

Earnings revision for Chinese corporates are already showing upwards momentum since February.

As of March 21, corporate earnings growth for 2019 and 2020 are 12.2% and 13.1% respectively.

Trading at a discount to our fair price-earnings (PE) multiple of 13 times, the forward PE ratios for the CSI 300 Index are 12.2 times and 10.8 times for 2019’s and 2020’s earnings respectively.

A pick-up in corporate earnings in 2H19 should support price growth alongside further stimulus, if the Chinese government decides to dig deeper into its policy arsenal