With China?s lawmakers continuing its discussions at its annual legislative and political advisory in Beijing, HXL has been analysing what has been released and what does it mean for equities in China.

The National People?s Congress brings almost 3,000 delegates from all over China; including some of the country?s richest and most influential businesspeople, to discuss policy and the future direction of the country.

Premier Li Keqiang began proceedings by announcing that financial stability, environmental clean-up and poverty alleviation are key tasks for the government this coming year. On this basis, investors should focus their share portfolios with exposure to banking, environment protection/clean-up and consumer industries as these will receive strong government policy support.

The government will continue with its measures to further open up financial markets along with its ongoing push to limit credit growth and rein in financial risk by increasing regulatory supervision of shadow banking and internet finance. These measures will benefit large banks and insurers in the long run as reform improves their asset quality by lowering the risk of bad loans and stabilising the financial market.

The government?s plan to lift the entire population out of poverty will boost consumption which should flow through to an increase in income tax revenue. As mentioned earlier this year, HXL remains positive in buying and holding Chinese shares as it is expected that Chinese listed companies will see profits increase by around 10% this year. Although the benchmark Shanghai Composite Index is down 7.5% and the Shenzhen Index also down a similar amount since their January highs, the recent sell-off was mainly impacted by negative sentiment overseas started by a spike in yields on US Treasuries and traders offloading their holdings in big-cap companies.

Environmental Protection

China announced a 19% increase in spending on anti-pollution initiatives. The government is pushing households in the north of the country to switch from coal to gas heading. Although the process did not run smoothly, it did result in a reduction in air pollution in places like Beijing.

Businesses in new energy and manufacturers of environmental-protection machinery will benefit over old-economy shares like steel and coal. Another sector investors should explore are telecommunications companies and equipment makers as the government report outlined an increase in investment for internet access in rural areas across the country.

The Property Market

HXL still remains cautious in buying property shares as the government is drafting a real estate tax law that will have a huge impact on the property market. The introduction of the tax is part of a wide-ranging attempt to control speculation that has fuelled the overheated property sector. While the proposed tax will increase local fiscal revenue, it will affect sales as the cost of holding certain property increases.

Over the past year, some of the best performing Chinese shares have been property developers with the likes of China Evergrande Group, Sunac China Holdings Ltd. and Country Garden Holdings Co. up at least 140%. However, all three stocks fell after Premier Li?s work report was issued as any restrictions put on purchasing property will hurt sales.

An introduction of a tax could impact these developers, especially Country Garden, as it is the country?s largest and has relied on third- and fourth-tier cities for sales growth last year. In 2017, the company recorded sales of 500 billion yuan (US$79 billion). However, shares have dropped 5.5% this year, while Evergrande is down 9.5% and Sunac down 5.9%.

It appears that price growth in China’s property market peaked in September 2017 and during January this year, home prices in first-tier cities started to drop.

Economic Growth

China?s future economic growth is not without headwinds. Financial deleveraging, slowing property sales and weaker property investment are likely to be major factors that slow economic growth from 6.9% in 2017 to 6.6% this year.

It is widely stated that China?s external demand would be adversely affected by the recent increase in trade tensions with the United States. Certain sectors will be harmed by targeted tariffs and restrictions however, it is of our opinion that any impact might be overestimated as there will be a small macroeconomic impact on the country?s exports and GDP growth. Any negative impact from trade friction will be offset by the broader global recovery which will help drive China?s 2018 export growth.

Even with the possibility of slower infrastructure and property investment, consumption growth should stay resilient throughout this year owing to solid income growth, supported by strong export and service sector activity. This was evident during the week-long Lunar New Year Holiday where Chinese inflation surged to its fastest in more than four years as increasingly affluent Chinese consumers spent record US$146 billion on high-quality products, unique travel experiences and movie tickets.

There is a lot of inflationary pressure coming through particularly in food prices. As a result, CPI is getting close to the 3% target level maintained by the People?s Bank of China. However, CPI may trend downwards in the coming months as traditionally there is strong demand for goods and services during Lunar New Year.

Overall, HXL expects slower economic growth in 2018 due to slower infrastructure investment, a weaker property market and ongoing deleveraging to reduce financial risk. These factors will see the country?s move toward higher-quality rather than faster economic growth.

HXL Partners

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