The 7 points you should take away from China’s “ Two Sessions”

2.  What does the growth target imply about the stimulus outlook?

We anticipate an uptick in fiscal stimulus, evident in the language of 'proactive,' 'appropriately intensified,' and 'improved in quality and efficiency’ as well as the ambitious growth target.  This is evident by a slight increment in the special local government bond quota, rising from last year’s 3.8 trillion yuan to 3.9 trillion yuan for infrastructure spending. Despite the modest increase, the primary focus of this stimulus package remains risk mitigation rather than a substantial economic boost.

In addition, China is bolstering its efforts with plans to issue 1 trillion yuan of ultra-long (over 10 years) special treasury bonds annually for several years. These bonds will fund major national strategies, emphasising long-term projects with extended return cycles, such as urban village renovations, national computing hubs, and data centres.

While maintaining a fiscal deficit cap at 3%, the experience from last year suggests a potential mid-year adjustment if additional stimulus is deemed necessary to achieve GDP growth.

Regarding monetary policy, the current stance is described as 'flexible, appropriate, targeted, and effective.' This represents a slight moderation from last November's policy report, which used terms like 'targeted and forceful.' PBOC recently made a 50bps cut in the required reserve ratio and there could be room to cut it further. However, we do not think there will be an abrupt adjustment to the 5-year loan prime rate in the near term after a recent 25bp reduction.

3.  Can the property market rebound this year?

For the first time since 2019, the government omits the slogan 'housing is for living in, not speculation’ for the work report. This shift signals a current focus on reviving and stabilising the property market. However, in February, China Real Estate Information Corp (CRIC) revealed a staggering 60% YoY drop in contracted sales for the top 100 developers, amounting to a record low of 185.9 billion yuan only. This indicates that the sector is far from making a turnaround.

To address the sector's difficulties, China will continue to rely on pledged supplemental lending (PSL) and the newly implemented 'project whitelist.' As of 28 February, commercial banks have approved over 200 billion yuan in loans for qualified real estate projects. While these policies aim to enhance housing delivery, their impact on reducing excessive supplies remains limited.

4.  What strides has China made in the development of innovative chips and new technologies?

China has shown unwavering determination in developing homegrown technology, spanning electric vehicles (EVs), chips, space tech, and quantum computing. While supporting Huawei in chip innovation, China's current progress still falls short of competing with industry giants like Nvidia or AMD, especially with OPPO's chipmaking division ZEKU closing in 2023. Recent obstacles for AMD's tailored chips for China further underscore the challenges, indicating a formidable journey for China to catch up.

During the meeting, Premier Li highlighted China's focus on developing 'intelligent connected new energy vehicles,' integrating electric batteries with intelligent features driven by semiconductors, extensive data sets, and computing capabilities. However, the U.S. has initiated an investigation into vehicles imported from China, citing national security risks. In a worst-case scenario, the U.S. could impose bans, as seen with TikTok. Amid an increasingly hostile external environment, coupled with a slowing economy and local governments burdened by debt, China's innovation may face potential technical and capital constraints for ventures with extended return cycles.

5.  Can we expect China's accommodative foreign policy to persist?

China is adopting a less assertive stance in its foreign policy. Regarding the Taiwan issue, Premier Li stated that China will resolutely 'oppose' independence, contrasting with previously used terms such as 'fight' independence. China aims to send a friendlier message to attract foreign capital and regain the confidence of foreign investors. Hence, we believe this tone will persist, at least for now.

6.  What implications does Premier Li Qiang's absence from the press conference hold for China's transparency?

Legitimate concerns about China's transparency have arisen, particularly with the unprecedented omission of the traditional press conference featuring the premier after the National People’s Congress. This departure from historical norms has sparked doubt, prompting questions about whether this reflects a form of forceful state control, wherein only one person's perspective is deemed significant. This has and will continue to send negative sentiments to the market.

7.  Do we change our views on China after the work report? If not, what do we need to see before turning more neutral on China?

We project an upside potential of 11.8% for the MSCI China Index by the end of 2026 (Table 2). However, there are no positive catalysts on the horizon that could trigger a re-rating. Given the economic slowdown, ongoing challenges faced by the property sector, and an increasingly hostile external environment, investors still face substantial risks.

We will prioritise our attention on three key areas. Firstly, we will assess the stabilisation in the property market, indicated by improvements in the delivery rate and a deceleration in the decline of contracted sales. We will also closely monitor the impact of adjustments to the 5-year loan prime rate (LPR) and the reserve requirement ratio (RRR) on credit demand. Secondly, we will focus on the improvement in consumption demand and its potential to drive higher inflation rates. China's January consumer price index recorded a 0.8% YoY decline, significantly below the target of 3%. Lastly, we will assess confidence in China's market, evaluating whether it translates into stronger investment sentiments rather than relying solely on support from the 'national team'.

Hence, we continue to recommend investors to underweight China in their portfolios. Within equities, investors may consider shifting their investments towards the ‘New Asian Tigers’ - Singapore, Japan, and South Korea.

Table 2: Upside Projection for MSCI China Index

MSCI China Index	FY23	FY24E	FY25E	FY26E
PE Ratio (X)	10.5	10.2	9.5	8.6
Expected Earnings Growth (YoY%)	1.4%	3.2%	6.8%	10.5%
Earnings Per Share (EPS)	4.8	5.0	5.4	5.9
Projected Fair Price (based on a fair PE ratio of 10.0X)				59.5
Potential Upside				11.8%
Source: Bloomberg Finance L.P., iFAST Compilations Data as of 5 Mar 2024

Table 3: Recommended Products

Countries	Unit Trusts	ETFs
Singapore	Nikko AM Singapore Dividend Equity SGD	SPDR® Straits Times Index ETF (SGX.ES3)
Japan	Eastspring Investments - Japan Dynamic AS SGD	iShares MSCI Japan ETF (NYSE.EWJ)
South Korea	LionGlobal Korea Fund SGD JPMorgan Funds – Korea Equity A (acc) USD	iShares MSCI South Korea ETF (NYSE.EWY)

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.