China’s policymakers have two main objectives: maintaining decent economic growth and pursuing structural reforms. In 2017, we expect China to put greater emphasis on maintaining growth, with less priority on structural adjustments (such as reforms and debt reduction), given that growth is still the most important element for China’s long-term stability.
We believe the government will enhance growth through targeted infrastructure spending, offsetting the slowdown in private investments. We also expect the government to remain generally accommodative in the property sector, given the significance of this sector to overall gross domestic product (GDP) growth. That said, property measures will be differentiated across the country, with selective tightening in cities that are perceived to be overheating, and supportive policies in less affluent and overbuilt cities.
Looking ahead, we expect growth to be stable and resilient, with consumption being the major contributor. We anticipate retail sales in China will maintain an annual growth rate of about 10%,1 supported by resilient wage growth. Disposable income per capita for the urban population grew in the range of 8% to 13% year-on-year2 over the past year, and we expect this trend to continue. In addition, we believe the consumption sector will continue to benefit from the rising demand in services. Ranging from hospitality, retail, financial services, health care, education and information technology services, we expect the services sector to be a key source of growth in the coming year.
We will continue to monitor China’s debt condition closely. The overall debt is now 255% of GDP, compared to 150% 10 years ago.3 This surge was driven by excess gearing, or leverage, following the aggressive stimulus program in 2008. While we acknowledge that the overall gearing level is high, there are three reasons why we believe there is no imminent risk of a short-term crisis:
One positive development in the banking sector is the increasing penetration in household loans and the slowdown in corporate lending. Similar to the deleveraging process in an economy, rising consumer credit demand can help spur the economy while allowing time for troubled corporates to undergo restructuring and deleveraging. Also, household loans, particularly mortgages (backed with houses as collateral), have lower default risk than that of the corporates, and thus are considered better-quality loans. In our view, the banking sector’s loan book quality should gradually improve as the consumer loans rise over time.
The Shanghai-Hong Kong Stock Connect program has opened up accessibility between onshore and offshore Chinese equity markets, without the need for QDII/QFII/RQFII quotas. The recently launched Shenzhen-Hong Kong Stock Connect will complete the system, and both programs will allow two-way investments between onshore and offshore markets, covering the majority of stocks listed on the Shanghai, Shenzhen and Hong Kong exchanges. We see this as an innovative approach that promotes higher market accessibility between the two markets without sacrificing control over capital flows.
The potential benefit for global investors from the increase in market accessibility via the Stock Connects is twofold:
In 2017, growth, debt and liquidity will be in the spotlight for the Chinese economy and markets. While we closely monitor the macro developments in China, our focus is on stock-specific fundamentals. As active, bottom-up investors, we adopt a selective approach to investing in companies with sustainable leadership and competitive advantages. Companies we select for our portfolios share a number of common, qualitative features — competitive products or services, superior business models and solid corporate governance with clear ownership structures, as well as transparency and corporate access.
1 Sources: CLSA and NBS, August 2016
2 Sources: CLSA and NBS, August 2016. Quarterly year-on-year growth rate.
3 Sources: Bank for International Settlements and Invesco, as of September 2016. Data as of first quarter 2016.
4 Source: JPMorgan, September 2016
5 Sources: HKEX and Invesco, as of October 2016
6 Source: HK Stock Exchange Factbook 2015
7 Sources: MSCI, Factset, Bloomberg L.P. and Invesco, as of September 2016
Important information
Blog header image: Toa55/Shutterstock.com
Launched in November 2014, the Shanghai-Hong Kong Stock Connect is a securities trading and clearing links program that allows both international and domestic investors to make cross-border stock purchases between the Shanghai and Hong Kong stock markets.
Launched in December 2016, the Shenzen-Hong Kong Stock Connect is a securities trading and clearing links program that allows both international and domestic investors to make cross-border stock purchases between the Shenzhen and Hong Kong stock markets.
QDII stands for Qualified Domestic Institutional Investor. This scheme permits registered Chinese financial institutions to invest a limited quota of funds in foreign financial assets, including offshore-listed Chinese equities. On the other hand, global investors can access China A-shares through the QFII (Qualified Foreign Institutional Investor) and RQFII (RMB Qualified Foreign Institutional Investor) schemes. However, these schemes are available only to institutional investors who can fulfill capital and asset size requirements. Detailed submissions and preapprovals are needed for the mentioned schemes.
H-shares refers to mainland Chinese companies listed on the Hong Kong Stock Exchange. As of Nov. 1, 2016, H-shares are trading at a discount to A-shares for the dual-listed Chinese companies.
The MSCI A-Shares Index captures large- and mid-cap representation across China securities listed on the Shanghai and Shenzhen exchanges.
The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
Investments in companies located or operating in Greater China are subject to the following risks: nationalization, expropriation, or confiscation of property, difficulty in obtaining and/or enforcing judgments, alteration or discontinuation of economic reforms, military conflicts, and China’s dependency on the economies of other Asian countries, many of which are developing countries.
Mike Shiao
Chief Investment Officer, Greater ChinaMike Shiao joined Invesco in 2002 and was promoted to Chief Investment Officer, Greater China in 2015. With over 23 years of industry experience, he leads the Greater China equities team and focuses on the Greater China equity strategy, covering the Hong Kong, China, and Taiwan markets.
Previously, Mr. Shiao was head of equities for Invesco Taiwan Ltd. He started his investment career in 1992 at Grand Regent Investment Ltd., where he worked for six years as a project manager supervising venture capital investments in Taiwan and China. In 1997, he joined Overseas Credit and Securities Inc. as a senior analyst covering Taiwan technology sector. Mr. Shiao also worked at Taiwan International Investment Management Co., as a fund manager and was responsible for technology sector research.
Mr. Shiao holds a bachelor’s degree from National Chung Hsing University, Taiwan and a Master of Science degree in finance from Drexel University, Philadelphia.