China: A policy shift towards stimulus

Much of the analyst commentary about the details of China’s new budget announced at the National People’s Congress (NPC) assesses it to be in-line with expectations or slightly below in some areas. However, our Chief Economist, Ray Farris’ read is that it has ushered in an important policy shift towards stimulus that will support China’s markets. We expect that Beijing will spend whatever it takes to keep GDP growth above 4.5% in all but the worst-case scenario of the US raising its tariff rates on China to 50% - 60%.

Nonetheless, our read is that focusing on these specifics misses the message that the government will do more if needed to get close to its 5% GDP growth target for 2025. To be sure, officials have said that the government has reserved policy measures (宏观经济政策还留有后手) it can draw on if necessary.

This implies the government may ultimately expand the augmented public sector deficit by more than current estimates of 1.7%-1.8% of GDP this year. It could fund this through drawdowns of fiscal deposits, transfers from other fiscal accounts, or even another increase in long-term bond issuance.

This stimulus still seems likely to come in fits and starts in response to bouts of weakness instead of being as pro-active or large as in 2008-2010. The key measures we see are as follows:

Healthy sign for the markets

Despite limited upside surprises from the NPC, the H and A-share markets remained resilient, a contrast to earlier episodes when the markets sold off in response to “in-line” stimulus announcements. Yuan Yiu Tsai, Portfolio Manager, Equities views this development as a healthy sign that the equity markets are shifting their focus from ‘stimulus hopes’ to the improving fundamentals across several sectors. Following the AI-fueled internet/tech rally, Yuan Yiu believes that domestic cyclicals could provide the next leg of market re-rating as valuations remain attractive. He likes brokers, anticipating a recovery in IPOs and equity placements from a low base. Additionally, he expects cement and steel companies to benefit from supply side reforms and an acceleration of infrastructure projects. The construction machinery sector should see gains from the replacement cycle, while dairy companies are poised for growth from the consumption recovery and normalisation of raw milk prices.

Consumption in focus

The emphasis on boosting consumption and household income stood out for Xiaochong Yao, Portfolio Manager, GEM equities in this year’s NPC, and she believes that this could remain a policy focus for the coming decade as China’s investment-driven growth model reaches its limit. As the property market continues to stabilise, consumption growth could accelerate due to high levels of household savings. In fact, we may be nearing a tipping point: household excess savings grew at a slower pace of low-to-mid single digits since 2024, peaking in the second quarter of 2024 before declining in the third quarter.

Given this, the Global Emerging Markets equity team is positive on selected consumption-related sectors, including but not limited to ecommerce, F&B and healthcare. The team continues to be highly selective, focusing on idiosyncratic opportunities that are trading substantially below their intrinsic value, while navigating the volatility brought about by US-China tariffs.

More opportunities but monitoring risks

Jocelyn Wu, Portfolio Manager, Greater China equities, believes that the current policy environment creates more investment opportunities in the Chinese equity market. She favours consumer staples and select consumer discretionary sectors that showcase innovation, along with Technology, Media and Telecom (TMT) sectors that benefit from technological advancements, either through increased demand or cost reductions. Meanwhile, Jocelyn notes that onshore A-share investors seem less focused on this year’s NPC and are more focused on developments in AI and technology instead.

At the same time, the China A and Greater China equity teams continue to monitor ongoing geopolitical risks. Some of the key events which the teams are watching include the Maritime Shipping 301 Investigation (March 24), expiration of Section 301 exemptions (April 15th) and potential tariff hikes following the “America First” trade review. There could be a mismatch between risk events and policy responses. While the government may announce new policies to counter trade impacts at the Politburo meeting in late April, any meaningful policy adjustments are unlikely until the Politburo session in July.

A decent re-entry point

Matthew Kok, Portfolio Manager, Asian Fixed Income believes that Chinese policy stimulus is likely to stay reactive and incremental this year. The prevailing policy stance and benign economic environment will be supportive of China Government Bonds (CGBs), and the most recent sell-off provides a decent opportunity to re-enter following the intense rally in Q4 last year.

While Chinese policymakers had reiterated that monetary policy will be “moderately loose”, CGBs sold off sharply after the People’s Bank of China failed to announce the highly anticipated cut to the Reserve Requirement Ratio last week. He feels that the timing of further monetary policy easing is highly reliant on the RMB’s stability, which is in turn dependent on the US Fed’s actions. However, even if US inflation remains sticky and the Fed keeps rates on hold for the rest of the year, China still has other avenues to inject liquidity into the system, such as reverse repo operations or resume their bond buying programme (balance sheet expansion).