去年12月召開的中央經濟工作會議 （CEWC）的政策基調顯示，北京似乎已經有準備接受國內生產總值（GDP ）增長放緩，以作為進一步去槓桿化和深化經濟結構改革的成本，並藉此提高產出效率、刺激消費，提升國家的工業水平。作者認為，在這樣的政策取向下，將使今年的GDP增長下調至 6.2%，以平衡兩個互相衝突的趨勢──消費和新經濟投資的增長，相對房地產市場放緩，以及更多的減債措施和治理污染活動。
What are the opportunities and risks for investing in Chinese assets in the coming year? How should investors position themselves in terms of equity and fixed-income portfolio strategies? The following article provides a snapshot to these timely issues that investors are asking about for 2018
A New Year “gift” by the PBoC
The PBoC opened the New Year with a RMB2 trillion liquidity injection. This New Year “gift” is for temporary liquidity management but not a change in its neutral monetary policy stance, which was re-affirmed by the Central Economic Work Conference (CEWC) in December 2017.
The liquidity injection is only for 30 days and takes the form of a temporary two-percentage-point cut in the bank reserve requirement ratio (RRR) for domestic commercial banks to meet high liquidity demand ahead of the Chinese New Year (which will start on 16 February). Currently, the RRR for large banks stands at 17% while that for medium- and small-sized banks at 15%.
The CEWC’s policy tone shows that Beijing appeared to be prepared to accept slower GDP growth as a cost for more deleveraging and structural reform efforts to improve output efficiency, boost consumption and upgrade the country’s industrial capacity. In my view, this policy preference will deliver a controlled slowdown in GDP growth this year (to 6.2% as in my forecast) balanced by two conflicting forces: consumption and new-economy investment growth versus a property market slowdown, more debt-reduction measures and an anti-pollution campaign.
Benign macroeconomic backdrop
The PBoC has been entrusted with a dual-policy-goal of supporting GDP growth and reducing debt. It will try to manage these conflicting goals by fine-tuning policy (such as using the temporary RMB2 trillion injection discussed above) to prevent any liquidity squeeze stemming from the deleveraging efforts from creating systemic shocks that could hurt GDP growth.
Meanwhile, the authorities will keep a selective regulatory tightening bias to push for more deleveraging. The cyclical and structural headwinds to growth and the potential risk of capital outflows will likely keep inflation at bay and may even prompt a 50bps cut in the RRR in the second half of this year.
All this should create a Goldilocks macroeconomic backdrop that is benign for Chinese asset prices. However, microeconomic/credit risk at the firm and sector levels are expected to rise due to intensifying debt-reduction and structural reform efforts. The key equity investment theme in 2018 is consumption, supported by industrial upgrading and industrial migration to the inland provinces. This industrialisation trend is expected to shift the whole income distribution curve forward, benefiting staples and discretionary consumption segments and the share of e-commerce in total consumption.
Another major investment theme under China’s “new normal” growth environment is “beautiful China” (in President Xi Jinping’s words). This will benefit the environment sectors, including clean energy, electric vehicles and battery, emission control and environmental protection segments. Industrial upgrading under the “Made in China 2025” directive will benefit high-tech sectors including information technology, robotic, high-end machinery, cloud computing and semi-conductor.
The polluting and over-capacity industries will continue come under contractionary pressure as Beijing seeks to tighten environment standards and focus on “green” economic development and efficiency improvement. So expect some small players to exit the market through controlled bankruptcies and mergers and acquisitions by the large players.
Uneven liquidity stress from more deleveraging
Intensifying deleveraging efforts by selective tightening will create uneven liquidity stress across the industries. To gauge the system’s financial vulnerability, a recent study of 40 industries has ranked each industry’s debt-to-asset ratio and its share of liability to total industrial liabilities from high to low. The two rankings are added together to arrive at a financial stress score for the industry – the higher the score the higher the stress it will likely face when liquidity conditions tighten under Beijing’s debt-reduction efforts.
Financial stress scores of industries
The comparison (see chart) shows that, unsurprisingly, the excess-capacity sectors (including coal, utility and metals etc.) are the most vulnerable sectors. Most of them are also upstream industries dominated by highly-leveraged SOEs. These industries experienced sharp profit improvement and price gains in 2017 due mainly to the sharp rebound in PPI inflation. With upstream inflation likely moderating in the coming quarters, their outstanding performance is unlikely to repeat in 2018, from a macroeconomic perspective that is.
Implications for fixed-income
With microeconomic risk rising under Beijing’s hawkish debt-reduction stance, Chinese onshore credit spread will likely increase further this year (while government and policy-bank bond yields will not be affected much). Small and regional property developers and builders face the biggest default risk in the onshore market, as they are most heavily exposed to wholesale, including shadow bank, funding which Beijing’s selective tightening measures are aiming at reining in.
However, if the market sells off indiscriminately on fears of further financial crackdown, the property sector may also present an opportunity for picking up under-valued bonds of good issuers. Credit-risk management and staying short-duration are key tactical strategies this year. Continued financial opening and increasing foreign participation in China’s capital market are credit-positive in the longer-term.