We believe the accommodative policy environment could support earning growth of listed companies.
Chaoping Zhu
Global Market Strategist
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In brief
- The annual session of National People’s Congress (NPC), starting on March 5, should focus on economic stability and policy support.
- In order to reassure confidence, further communication and clarification on the long-term reform plans are also expected.
- These policies should help to reinforce business and market confidence after a challenging year for Chinese equities.
Starting on March 5, the annual session of NPC will take place in Beijing. Amid the softening economic growth and dropping stock prices, this conference is likely to draw massive attention from the market, as more accommodative policy measures are expected. Moreover, in order to restore the confidence of the private sector and investors, top policymakers might take this opportunity to communicate the targets and operations for its long-term reform plans.
Setting the annual growth target is always the top agenda for annual NPC sessions. In 2022, we expect a flexible growth target likely between 5% to 6%. An annual growth rate above 5% is close to China’s long-term growth potential, and it is also a critical level to create sufficient employment opportunities. Meanwhile, a moderate and flexible growth target is also helpful in preventing excessive stimulus and aggressive debt building by local governments.
In order to mitigate growth risks, more accommodative policies are expected. Since the third quarter of 2021, People’s Bank of China has shifted to monetary easing, and cut both required reserve ratio and the loan prime rate in recent months. Lending restrictions to the real estate sector were also loosened. However, as confidence among private sectors and consumers remain depressed, current monetary stimulus seems insufficient to boost long-term loans and investment in the real economy. Therefore, continuous monetary easing, particularly reducing financing cost, is expected to be hinted in Chinese Premier Li Keqiang’s Government Work Report.
Fiscal measures might have more direct impacts in boosting growth during the first half of this year. Reduction in tax and government fees might be advocated as the major policy tool to support the real economy, particularly towards small and medium-sized enterprises. The central government will be more tolerant to the transitory rise in leverage ratio. The NPC might approve a fiscal deficit to GDP ratio at 3.2% for 2022, which is the same level for 2021 but still higher than historical average. Local governments’ bond issuance quota could be raised to raise funds for infrastructure investment.
Exhibit 1: Earnings growth of MSCI China*
Earnings per share, year-over-year change, consensus estimates 
Source: FactSet, MSCI, J.P. Morgan Asset Management. *Sector indices used are from the MSCI China Index. Consensus estimates used are calendar year estimates from FactSet. Past performance is not a reliable indicator of current and future results. **Data for the forward price-to-earnings ratio in the real estate and health care sectors begin from 30/09/16 and 30/06/09, respectively.
Guide to China. Data reflect most recently available as of January 31, 2022.
Although the above short-term stabilization measures will draw much of investors’ attention during the NPC, another policy focus will be China’s long-term reform plans. As the second year of the 14th Five-Year Plan, 2022 will be the year of implementation. Themes related to high-quality development, including development of domestic technology sectors, improvement in population structure, control of systemic risks and green development, will be the spotlights in the Government Work Report and other legislative proposals to the congress.
Moreover, policy makers might also give further clarification to the targets and approaches for the reforms schemes launched in 2021. The intensive introduction of reforms has led to confusion among the private businesses and undermined investment confidence. Particularly, the anti-trust regulation in the internet sector makes it hard to value companies’ long term earnings outlook, especially for internet giants. This has led to their stocks underperforming in both the onshore and offshore markets. At the NPC, if policy makers could make the regulatory mechanism more transparent, it could help restore the confidence.
Investment implications
For investors, the NPC will be a good time to re-evaluate China’s economic policy and reset investment plans. We believe the accommodative policy environment could support earning growth of listed companies, as shown in Exhibit 1. The stimulus measures might also boost investors’ sentiment in the market, especially contrasting with more hawkish developed market central banks, and hence reverse the short-term weakness of Chinese stocks.
Consumption sectors might benefit from both warming consumer confidence and potential rebounding consumer price index. Strong earnings expectation and dampened stock prices offers attractive opportunities to sector leaders.
More clarification on the reforms and development plans will also give a guidance for long-term portfolio construction. High-quality growth via development of domestic technology remains to be the long-term investment theme as China keeps improve self-sufficiency in relevant sectors. Meanwhile, as the regulatory environment becomes more transparent and stable, internet sectors might also benefit from the potential revaluation.
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