Weekly Market Focus

China - Riding on key structural trends

Sean Quek,
Managing Director and Head of Equity Research,
Bank of Singapore, Member of OCBC Wealth Panel

Certain key structural trends were highlighted during the much anticipated 19th Party Congress last month and our view is that they offer potential investment opportunities over the medium to long-term, even as we maintain a Neutral recommendation on China offshore equities.

Quality of growth versus speed of growth

The quality of China’s growth – instead of the speed of growth – was heavily emphasised by the new leadership team at the recent 19th Party Congress. An ambitious two-stage long-term development plan was tabled, which aims to transform China into one of the leading countries in innovation by 2035 with a sizeable middle-income population. By 2050, China will become an advanced socialist country with leading global influence.

Structural trends

President Xi outlined the importance for China to find new growth momentum in areas like medium and high-end consumption, and to facilitate the transition towards a consumption-based economy with a sizeable middle-income population.

This could lend further support to domestic consumption growth. China’s domestic consumption has remained buoyant with consumer confidence index staying on its uptrend. In our view, this trend should be well supported by solid growth in income. The average income of urban and rural residents has been growing at a compound annual rate of 10 per cent and 13 per cent respectively over the past decade.

With this in mind, we believe some of the bigger names within the consumer sector would benefit. Key players in the travel service company will be among the top beneficiaries of rising middle class income in China.

Technological innovation has become one of the decisive factors for China’s growth and the quality of that growth going forward. There has been a heavy emphasis on the ability to innovate and to integrate internet, big data and artificial intelligence. As labour costs continue to rise, robotics revolution will also become important for industries upgrade. At the same time, financial technology has seen a rapid development, in response to China’s fast e-commerce penetration and under-served retail banking customers.

However, while information technology will offer medium and long-term growth, investors should be mindful of the sector’s valuations. We view any share price pullback in the IT sector as potential accumulation opportunities. Environmental protection is another area of focus for the Chinese government, with priority on water conservation and the fight against air and soil pollution. Further clarity on policy support in addressing environmental issues would provide catalysts for this lagging sector to catch up with performance.

Relaxation in real estate tightening measures is unlikely

Amid rising home prices, the view that housing is for accommodation and not for speculation was reiterated at the 19th Party Congress. The government also vowed to set up a system with supply from various parties. We are cautious on the sector and do not expect any loosening in property regulatory policies in in the near term. Real estate has been the best performing sector year-to-date, having risen by 96 per cent and substantially outperformed MSCI China.

As a result, the sector will likely to come under profit taking pressure. Within the sector, investors should be selective and focus on beneficiaries of market consolidation moves, while avoiding those with a substantial land bank holding in tier three or four cities.

What’s next?

Looking ahead, the upcoming key events to watch out for include the Central Economic Work Conference around the period of December 2017-January 2018, where economic policies will be discussed and announced; the National People’s Congress in March next year will be where the growth targets are usually announced.