In brief

• The 20th Party Congress emphasized high-quality development and China-style modernization as policy goals.
• A series of important conferences between now and next spring should lay out the short-term policy plan to stabilize the economy.
• Chinese long-term plans to achieve high-quality growth might bring long-term opportunities to hardware technology sectors, while some traditional growth pillars might face policy headwinds.

The 20th Congress of Communist Party of China concluded on October 22, followed by the first Plenum Session and announcement of the new leadership group of China on October 23. High-quality development and China-style modernization were emphasized as policy goals for the coming decade. These principles will be transformed into policy measures, introducing new challenges and opportunities for global investors.

The Party Congress was never about short-term economic policies. There will be a series of important conferences between now and March 2023 that will set policy priorities in the near term. We expect to see transition to a more market-friendly environment, with continuous accommodative policies accompanying gradual relaxation of zero-COVID measures. Meanwhile, new policy guidelines and initiatives are also expected to be announced to promote high-quality growth and structural improvement in the economy.

The National Financial Work Conference (NFWC) is expected to take place in November, followed by the annual Central Economic Work Conference (CEWC) in late December. The NFWC usually sets key guidelines for financial policies in the next five years, such as strengthening regulation and mitigating financial risks proposed at the 2017 session. In comparison, the CEWC is more focused on short-term policies in the upcoming year.

Given the lingering growth risks, stability should be one of the major themes at these two conferences. Accommodative policies introduced this year, such as monetary easing, consumption support, and tax incentives for small business may be continued.

To address the challenges in real estate sector, policy coordination might be enhanced at national level, with additional government funds injected into projects currently under construction to guarantee delivery to buyers. Financing conditions for low-leverage developers and first-home buyers might also be eased moderately. However, under the principle of “houses are for living in, not for speculation”, large-scale liquidity injection still remains unlikely given the risk that it may lead to a surge in prices.

In late February 2023, the annual sessions of national and provincial People’s Congress will mark the completion of government personnel transition, when senior official nominations for central government, ministries and provinces will be approved by legislators.

The annual growth target (currently 5.5%) will be announced at the National People’s Congress. In 2023, a gradual economic recovery is expected on the base of weak growth throughout 2022, therefore the growth target might be lowered to a range of 4 to 5%. Meanwhile, monetary and fiscal stimulus measures might also be proposed in line with the CEWC. To relieve fiscal pressures on local governments the annual budget deficit ratio might also be raised.

Lifting both consumer and corporate confidence is key in maximizing the efficacy of policy stimulus, and this is closed associated with the trend in pandemic control measures. Recently, some signs are emerging for fine tuning to the zero-COVID policies. For instance, the number of inbound flights have increased, and passengers in some regions are no longer required to show PCR testing results when boarding trains or flights. To find a balance between economic growth and pandemic control, we may see a gradual shift toward a more flexible approach in China’s COVID policy.

Beyond the short-term policy moves above, Chinese long-term plans for high-quality growth are even more relevant for investors. In President Xi’s report at the Party Congress, development of the real economy, self-sufficiency of technologies and national security are emphasized as top priorities. On such basis, technology hardware sectors will receive more government funding, regulation support and market access. On the other hand, traditional growth pillars such as finance, real estate and internet platforms might face sustained policy headwinds.

Investment Implications

In 2023, we expect to see gradual relaxation of zero-COVID policy and continuous accommodative polices, which could help stabilize Chinese asset prices. The pursuit of high-quality growth might also support the position of Chinese stocks in global asset allocation. That said, sector performance will differentiate widely given the impacts of more targeted industrial policies. This suggests active management and sector selection remains critical for investors investing in China.

Figure 1. Domestic technology sector might benefit from policies to achieve self-sufficiency rate

Current self-sufficiency rate amongst different technology products

Source: J.P. Morgan Asset Management.
ERP= Enterprise resource planning; IaaS = Infrastructure as a Service; IC= Integrated circuit; PCB = Printed circuit board; RF IC = Radio frequency integrated circuit. Based  on J.P. Morgan Asset Management’s estimates as of October 31, 2022. Forecasts, projections and other forward-looking statements are based upon current beliefs and expectations. They are for illustrative purposes only and serve as an indication of what may occur. Given the inherent uncertainties and risks associated with forecast, projections or other forward statements, actual events, results or performance may differ materially from those reflected or contemplated.
Guide to China. Data are as of October 31, 2022.

With an active management approach, there will be sufficient opportunities in sectors with long-term growth potential and policy conviction. Top domestic players in technology sectors with low to middle-level technology entry barriers and low self-sufficiency rate (Figure 1) might generate attractive alpha for active managers. This thesis could also be extended to electric vehicles and associated technology, as well as renewable energy.

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