Reading between the lines of China’s “Twin sessions”

China’s National People’s Congress, the annual plenary session of China’s legislature, is done and dusted. No major policy upheaval ahead the 19th Party Congress in November. Nonetheless, the shift in tone in the government work report have shed some light on China’s policy direction.

1. Tone shifted from “maintaining growth” to “containing risk”
The theme of stability, focusing on risk control and deleveraging have been reinforced by Premier Li Keqiang in the government work report. This tone was well set at the Central Economic Work Conference in December 2016.

The economic growth target in 2017 is softened to “6.5% or higher” while both the M2 and total social financing growth target were set at 12% in 2017, 1ppt lower than that of 2016. These targets reflect the government’s intention to contain rising leverage and pursue a prudent monetary policy.

A “neutral and prudent” monetary policy stance is further backed by the recent rate hikes in China together with regulation tightening. Reuters reported PBOC began taking into account off-balance sheet financing to its Macro Prudential Assessment (MPA) at the beginning of 2017. Furthermore, PBOC plans to tighten capital adequacy requirement by removing the “tolerance indicator”, according to sources[1]. The measures would make the expansion of risk assets by commercial banks more costly.

2. Stress on “real economy” and “innovation”
Both President Xi Jinping and Premier Li stressed that the real economy is the foundation for China’s development. The government work report stated that greater efforts will be made this year to upgrade the real economy through innovation.

It is noteworthy that the term “Artificial Intelligence” has been mentioned in the government work report this year, for the first time, saying that AI is one of the emerging industries where development will be accelerated. Many internet companies have been investing heavily on AI. By adopting AI, manufacturing companies could reduce cost and improve efficiency. According to The National Bureau of Statistics, in the first two months of 2017, the investment in high-tech industry grew by 18.4% yoy, or 9.5 ppt higher than the growth rate of total investment.

3. Why a “Total China” approach is the way forward?

Striving a balance between achieving growth target and reducing financial risks would pose both opportunities and challenges to the companies in China. In order to capture the growth story as well as mitigate the risk, a “Total China” approach to index investing should be considered.

The S&P China 500 Index offers a more comprehensive coverage of the top 500 Chinese companies, while approximating the sector composition of the broader Chinese equity market. All Chinese share classes, including A-shares, H shares, US listed ADRs are eligible for inclusion, subject to meeting minimum size and liquidity requirements.

As a result, the S&P China 500 Index offers a more diversified representation across sectors compared to existing major China indices (Figure 1). As of Dec 31, 2016, S&P China 500 has a weight of only 23.6% in the financial sector, much less as compared to FSTE A50 (66.4%), CSI300 (35.48%), and MSCI China (27.04%).  More weights are distributed to new economies such as Information Technology or Consumer Discretionary sectors, offering a more forward-looking representation of China’s economy in the new paradigm where technology-driven consumption plays a significant role.

Historical performance of the diversified S&P China 500 Index has demonstrated better risk-adjusted returns (Figure 2).  During the period from 31-Dec, 2008 to 31-Dec, 2016, the S&P China 500 Index generated an annualized return of 9.6% and a Sharpe ratio of 0.4, both are the highest among the major onshore and offshore China indices.

The S&P China 500’s all-inclusiveness and not biased towards any sector or large SOE mitigates the concentration risks and create a more balanced yet diversified China exposure.

[1] Source: Reuters, 9 March, 2017 http://www.reuters.com/article/china-finance-mpa-idUSL3N1GM2IU

 ————————————————————————————————————————-

DISCLAIMERS
The S&P China 500 Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by ICBC Credit Suisse Asset Management (International) Co., Ltd. (ICBCCSI), © 2016 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.  S&P, SPDR and S&P 500 are registered trademarks of Standard & Poor’s Financial Services LLC, a division of S&P Global (“S&P”). DOW JONES is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). These trademarks together with others have been licensed to S&P Dow Jones Indices LLC. Redistribution, reproduction and/or photocopying in whole or in part are prohibited without written permission. This document does not constitute an offer of services in jurisdictions where S&P Dow Jones Indices LLC, Dow Jones, S&P or their respective affiliates (collectively “S&P Dow Jones Indices”) do not have the necessary licenses. All information provided by S&P Dow Jones Indices is impersonal and not tailored to the needs of any person, entity or group of persons. S&P Dow Jones Indices receives compensation in connection with licensing its indices to third parties. Past performance of an index is not a guarantee of future results. Neither S&P Dow Jones Indices LLC, Dow Jones, S&P, and their respective affiliates (“S&P Dow Jones Indices”) nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.
In this document, ICBC Credit Suisse refers to ICBC Credit Suisse Asset Management Company Limited and its subsidiary, ICBC Credit Suisse Asset Management (International) Company Limited (“ICBCCSI”). ICBCCSI is a regulated entity under the Hong Kong Securities and Futures Commission.
No account has been taken of any person’s investment objectives, financial situation or particular needs when preparing this document. This is not an offer to buy or sell, or a solicitation or incitement of offer to buy or sell, any particular security, strategy, investment product or services nor does this constitute investment advice or recommendation.
The views and opinions expressed in this document, which are subject to change without notice, are those of S&P Dow Jones Indices LLC, ICBC Credit Suisse and/or its affiliated companies at the time of publication. While S&P Dow Jones Indices LLC, ICBC Credit Suisse and/or its affiliated companies (collectively as “we” or “us”) believe that the information is correct at the date of this presentation, no warranty of representation is given to this effect and no responsibility can be accepted by us to any intermediaries or end users for any action taken on the basis of this information. Some of the information contained herein including any expression of opinion or forecast has been obtained from or is based on sources believed by us to be reliable as at the date it is made, but is not guaranteed and we do not warrant nor do we accept liability as to adequacy, accuracy, reliability or completeness of such information.  The information is given on the understanding that any person who acts upon it or otherwise changes his or her position in reliance thereon does so entirely at his or her own risk without liability on our part.
This material has not been reviewed by the Hong Kong Securities and Futures Commission.  Issuer of this material: ICBC Credit Suisse Asset Management (International) Company Limited. This material shall be distributed in countries where it is permitted.
INDEX PERFORMANCE DISCLOSURE
The S&P China 500 was launched on August 28, 2015. All information presented prior to an index’s Launch Date is hypothetical (back-tested), not actual performance. The back-test calculations are based on the same methodology that was in effect on the index Launch Date. Complete index methodology details are available at www.spdji.com. Please read S&P Dow Jones Indices LLC’s DISCLAIMERS.

 

The posts on this blog are opinions, not advice. Please read our disclaimers.

Leave a Comment

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>