[JD Says] A Quick Investment Analysis of Government Work Report
March 5 marked the opening of the Fifth Session of China’s 12th National People’s Congress in Beijing. At the meeting, Premier Li Keqiang delivered the Report on the Work of the Government, in which some important signals were sent out. JD Capital attempts to analyze the signals from the perspective of investment.
Make steady progress while maintaining stable performance
The Central Economic Work Conference held at the end of 2016 underlined the importance of “making progress while maintaining stable performance” as the overarching methodology of all economic work, a point reemphasized in this year’s Government Work Report.
Before laying out the annual plan for 2017, the Report briefs on the general domestic situation of the upcoming 19th CPC National Congress. Then, the fact that “global economy struggles for growth, ‘de-globalization’ and protectionism rises, policy uncertainties and spillover effect of major economies aggregate, and destabilizing factors and uncertainties visibly increase” is emphasized. In a nutshell, as “stability” becomes more important internally, China faces the great challenge of resisting risks externally. This constitutes the premise of planning works for 2017.
Therefore, in setting goals for 2017, priority is given to stability rather than growth speed. The goal for economic growth rate changes from 6.5% – 7% last year to around 6.5% this year (or higher if possible in practice). Besides, China aims to create 11 million jobs, 1 million more than the targeted figure last year. Though the speed of creating new jobs slows down, as employment hinges on livelihood, employment quality must be improved, which embodies the philosophy that economic development must serve for national stability. The M2 money supply and aggregate financing are forecast to grow by 12% this year, down by 1% compared with last year. The drop in growth rate, albeit small, signals that China plans to rein in liquidity management and control leverage ratio with relatively neutral policies so as to avert risk accumulation.
This year’s Government Work Report differs slightly from last year’s in the elaboration of specific tasks. Last year, “the five priority tasks of cutting overcapacity, destocking, deleveraging, reducing corporate costs and shoring up weak spots” and “deepening reform” were elaborated under the same subtitle “stepping up supply-side structural reform”. This year, however, the two topics are discussed in two independent sections, with “the five priority tasks” put ahead, showing policy-makers’ determination of taking structural reform as the most important task.
Boost real economy through financial reform
In the Government Work Report of 2017, as many as 375 Chinese characters are devoted to the subject of financial reform.
The Report notes that the government will “prompt financial institutions to focus on their main business and make their services accessible to small and micro businesses, strengthen their ability to serve the real economy, and stop them from being distracted from their intended purpose”. The last task shows that the policy-makers are determined to put an end to the disconnection between financial institutions and real economy, which has kept capital in the financial system from flowing to real economy and led to mounting capital bubble, explosive growth in leverage and the weakness of real economy. This means that financial investment institutions should enhance its connection with real economy and financial capital should be more closely associated with different industries.
In order to achieve the goals mentioned above, the Report encourages banks and other financial institutions to develop inclusive finance and agriculture-related financial business, so as to meet the financing needs of micro, small and medium-sized enterprises as well as agriculture, rural areas and farmers. In terms of the capital market, while bolstering the main board, the government will “actively develop the ChiNext stock market and the new third board, and see that regional equity markets develop in a well-regulated way”, highlighting the role of ChiNext stock market, the new third board and the new fourth board in serving real economy. It is safe to forecast that reform in the ChiNext stock market and the new third board will accelerate, further improvement will be made in market mechanism and financing ability, and equity investment institutions will be able to have a clearer picture of investment withdrawal in the future.
The Report also notes that the government will “expand channels for using insurance funds to support the real economy”, in response to the previous progressive behaviors by some insurance institutions in capital operating on the secondary market. It can be expected that the government will guide insurance funds to long-term strategic investment and connect insurance resources with quality industrial companies, making insurance funds an increasingly important part in China’s long-term equity investment.
Investment opportunities in different fields
The Government Work Report issued every year never fails to touch on all aspects of national economy, and the directions it provides are for government work and social capital to follow.
To push ahead with the five priority tasks, the Report requires that the government carry out deleveraging in a proactive and prudent way. More specifically, the government will ensure that the idle assets of enterprises are put to use, push ahead with securitization of corporate assets and support market- and law-based debt-to-equity swaps, so as to bring down the leverage of enterprises. As a result, huge opportunities will be created in the field of asset securitization and non-performing asset disposition.
Regarding the reform of SOEs and state capital, the Report specifies the following goals: basically complete the introduction of corporate system into SOEs, make substantive progress in promoting the mixed ownership system in such industries as electric power, petroleum, natural gas, railways, civil aviation, telecommunications, and defense, and advance pilot reforms in state capital investment and management companies, etc. The reform of SOEs and the establishment of mixed ownership systems will create huge opportunities for investment.
In terms of consumption, the government will speed up the development of service consumption, and support the non-governmental sector in providing education, elderly care, healthcare, and other services. Fields with increasing demand and immunity from economic cycles will become new investment hotspots. The Report also notes that more efforts will made to boost tourism consumption, information consumption and consumption of quality products. As consumer habits and experience upgrade, the consumer industry of China is expected to embrace new transformation.
Investment still constitutes the driving force for continued economic growth, therefore investment in railway construction as well as highway and waterway projects remains at a high level. The Report requires closer cooperation between government and social capital, as public-private partnership holds great potential for investment. Also, the government will boost the development of national-level new areas, development zones, and industrial parks through innovation, which calls for combination of industrial assets and financial assets.
The Report underlines the importance of innovation-driven development as the engine powering the transformation and upgrading of real economy. In 2017, the government will accelerate the development of emerging industries, focusing on R&D on and commercialization of new materials, artificial intelligence, integrated circuits, bio-pharmacy, 5G mobile communications and other technologies. According to the Report, this year, mobile rates for domestic roaming and long-distance calls will be canceled; rates for broadband services for small and medium enterprises will be slashed; and rates for international calls will be lowered. Such strong reforms have a direct bearing on people’s livelihood, which reflects the government’s determination to develop digital economy.
In terms of traditional industries, the Report calls for transformation and upgrading. To that end, the government will, with the development of smart manufacturing as the focus, intensify efforts to implement the Made in China 2025 initiative, promote accelerated application of big data, cloud computing and the Internet of Things, and use new technologies, new forms of business and new models to bring about transformation in the production, management and marketing models of traditional industries.
The Report also lays emphasis on the policy of encouraging people to start businesses and make innovations. In explanation, the Report notes that this policy is an effective way of creating jobs through business start-ups and innovation; it is an important source of strength that fosters new growth drivers to replace old ones and upgrades economic structure; and it is an effective channel for promoting equal opportunity and facilitating vertical social mobility. Therefore, the government will keep on pushing hard with this policy. Accordingly, a favorable political environment will be created and maintained for business start-ups and investment.
As regards the development of modern agriculture, the government will work faster to see due standards are followed in agricultural production, and promote the development of brand name agricultural products. As industrial chain of agricultural industry improves and the added value of brand agricultural products increases, more investment opportunities will be created.
Another key aspect stressed in the Report is environmental protection. This year, the government will faster progress in improving the environment, particularly air quality, and strengthen the prevention and control of water and soil pollution. This means that energy consumption transformation, ecological conservation as well as energy-saving, environment-friendly industries remain priority targets of industrial policy support.
(The article represents the research findings of JD Capital Research Institute, but not the opinion of the company.)