China’s 2018 economic growth focus: Quality over quantity
The Central Economic Work Conference (CEWC) was held in Beijing on 18-20 December 2017 and, as the first CEWC after the 19th Party Congress, it set the tone for China’s central government’s economic policies in 2018. They are crucial to the long-term development of the world’s second-largest economy.
Highlights of the CEWC
(1) High-quality development over GDP targets
CEWC emphasised the quality of the economic development over specific GDP targets. The government will likely unveil its GDP growth target at “around 6.5%” during the National People’s Congress in March 2018 instead of “6.5% or higher if practically possible” in 2017. The government will follow its previous guideline of “making progress while maintaining stability” and keep economic growth within a “reasonable range.”
(2) Three key focuses: prevention of major financial risks, poverty alleviation and pollution reduction
- Preventing major financial risk. The government will focus on containing major financial risks to form a “virtuous cycle” among the financial, real and property sectors, as well as within the financial system1. There will also be increasing efforts to crack down on illegal activities in the banking, securities and insurance sectors as well as online finance.
- Poverty alleviation. President Xi pledged to lift all rural residents above China’s poverty line by 2020. The central government will also step up its supervision of local government bodies while allocating more fiscal resources to welfare, education and healthcare as well as public services in rural areas.
- Pollution reduction. The CEWC will focus on “significantly reducing” the gross emissions of major pollutants with a specific focus on air pollution control. Previous measures such as reducing industrial activities during the winter heating season will continue. China will also examine its industrial structure, energy structure and transportation structure in order to achieve eco-friendly development.
(3) Monetary and fiscal policies
- Monetary policy. The CEWC said China will implement prudent and neutral monetary policy2. However, following the Fed’s rate hike decision in December, the People’s Bank of China (PBoC) raised interest rates on medium-term lending facility (MLF) and reverse repo operations by a mere 5bps. The move was pre-emptive but it indicated that the PBoC is ready to use interest rates and other measures to ensure financial stability if volatility is triggered by external factors.
- Fiscal policy. The government will implement a proactive fiscal policy in 2018. In particular, the CEWC said the government will improve its supervision over local government debts. That being said, strategic projects related to government-led regional integration plans (such as the Guangdong "Bay area" blueprint, the Xiong'an new district, and the Yangtze River Delta city-clusters) will still be supported by government budget spending and debt issuance.
The CEWC confirmed that China will maintain stability of the RMB exchange rate at a reasonable equilibrium level. Although the global financial market volatility and the interest rate hike of the Federal Reserve will weigh in on the RMB exchange rate, the growth of Chinese economy and the ongoing RMB internationalisation will offset the impact. We expect two-way fluctuations of the RMB’s exchange rate in 2018.
The CEWC repeated that the government will establish the “long-term price mechanism” for the property market, with “equal emphasis on rentals and sales.” We believe this will encourage the professional and institutional participation in the rental market. We do not expect loosening of existing restrictions on purchases and resales to curb the property price. The development of private rental and public social housing may pick up. Going forward, the uncertainty in the property sector has somewhat increased.
To achieve high-quality development, the government will promote consumption and private investment to drive growth. Rural reform that is targeting poverty alleviation such as restoring land rights to farmers could also unlock rural land wealth of US$20trn and hence boost rural consumption.
The government has recently selected 31 central and local State-owned enterprises (SOEs) as the third batch of the mixed ownership reform pilots program. SOE reforms, especially the SASAC (State-owned Assets Supervision and Administration Commission of the State Council) reform will accelerate in 2018.
New energy and eco-friendly firms will gain from anti-pollution initiatives. “China going green” is a government-led initiative for investment in the medium term. Investment in rural infrastructures (roads, access to water, power and Internet, etc.) and industries will likely emerge as a new growing area of fixed asset investment.
How the S&P China 500 Index is positioned
Figure 1: Comparison of industry distribution (by GICS3 sectors weight (%)
Source: Bloomberg, FTSE, MSCI, China Securities Index, Hang Seng Indexes, S&P Dow Jones Indices;
As of 31 December 2017; Please refer to index disclaimers at the end of this blog.
Benefited from its diversification in markets and sectors exposure, S&P China 500 has demonstrated better risk-adjusted returns (Figure 2). During the period from 31 December 2008 to 31 December 2017, the S&P China 500 generated an annualised return of 13.0% and Sharpe ratio of 0.59, both are the highest among the major China indices.
Figure 2: Performance comparison4: SPC500 vs. major China indices
Source: S&P Dow Jones Indices LLC. Data as of Dec 30, 2017. Index performance based on net total returns USD. Charts and graphs are provided for illustrative purposes. These charts and graphs may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations associated with back-tested performance.
Source: Bloomberg, FTSE, MSCI, HSI, CSI, S&P Dow Jones Indices; Please refer to index disclaimers and index performance disclosure at the end of this document.
Past performance is not an indication or guarantee of future results.
1) ChinaDaily, 21 Dec 2017. http://www.chinadaily.com.cn/a/201712/21/WS5a3af4aea31008cf16da2822.html
2) ChinaDaily, 20 Dec 2017. http://www.chinadaily.com.cn/a/201712/20/WS5a3a3b4ba31008cf16da279a.html
3) The Global Industry Classification Standard (GICS®) was developed by and is the exclusive property and a trademark of S&P and MSCI.
4) Calculation starts from 31-Dec-08 to 31-Dec-17. “No of Stocks” data as of 31 Dec 2017. All data are converted to USD.
5) S&P China 500 (USD), based on back-test performance, annualized net total return. Source: S&P Dow Jones Indices LLC. Data as of Dec 30, 2017. Index performance based on net total returns USD. Charts and graphs are provided for illustrative purposes.