The 18th National Congress of the Communist Party of China, one of the most important political events of the year, will begin on Wednesday, October XNUMX. The reshuffle of the Politburo Standing Committee will be decisive in determining the centralization of power of the new government, as well as the economic and social policies of the coming years. On the economic front, the continuity of the policies described in the following paragraphs could have a significant impact on the stock exchanges.
Containment of financial risks
The “two sessions” (the Fifth Sessions of the 2th National People's Congress and the 2th Chinese People's Political Consultative Conference) held in March set the tone for the upcoming Party Congress, emphasizing the need to contain financial risks and maintain economic stability. Pending the congress, the government is working to reduce debt, as evidenced by the downsizing of the growth of the M8,9 aggregate (data on secondary liquidity). M2017 stood at 1996% y/y in August XNUMX, hitting an all-time low since XNUMX. In addition, ahead of the convention, eight cities approved restrictive housing measures, imposing bans on sell a property in the first two to three years after purchase. This demonstrates the government's firm intention to deflate the sector bubble. It is believed that the new government will continue to protect the economy from financial shocks.
Structural reforms
In recent years, the government has engaged in a process of supply-side reforms. Overcapacity has been reduced, causing PPI and manufacturing profits to recover. Regarding the reform of state-owned enterprises, 32 have completed restructuring since 2013, according to Premier Li Keqiang. As a result, operating and management costs have decreased and efficiency has improved, leading to a 40% increase in profits from 2012 to 2016 for restructured state-owned enterprises. The reform process could be accelerated in case of consolidation of political power after the reshuffle.
Investment outlook
Stability is essential for China's economic development. We believe that the new government will be committed to trying to curb risks and promote sustainable growth, paying close attention to these two aspects. De-leveraging could challenge the financial sector in the short term but will lead to more robust growth in the long run. We expect new economy sectors such as IT, Consumer and Healthcare to be less affected by the political transition.
Chinese stocks rallied steadily in August and benefited from the resilience of corporate earnings and the stability of the macroeconomic environment ahead of the congress. The S&P China 500 Index has rallied sharply by 32,59% YTD (as of Aug 31, 2017).
The S&P China 500 Index is underweight the financials sector (25%) versus the FTSE A50 (64%), CSI300 (37%) and HSCEI (73%) as of 31 August 2017. Other weightings are attributed to sectors of the new economy, such as IT (21%) and cyclical consumer goods (12%).
Taking advantage of diversified exposure to markets and sectors, the S&P China 500 has demonstrated superior risk-adjusted returns (Display 2). During the period from December 31, 2008 to August 31, 2017, the S&P China 500 generated an annualized return of 12,5% and a Sharpe ratio of 0,55 - both percentages are the highest among China's major indices.
