April 9, 2018

After China’s recent National People’s Congress (NPC), President Xi has a clear slate to implement long-term economic and social reforms. Deutsche Bank Wealth Management’s special report on China after the NPC looks at how these will be undertaken in a carefully controlled environment, with a continued focus on the quality of growth and deleveraging. In addition, the bank shares its views on different asset classes. It also identifies six key investment themes for 2018 and considers China’s increasing focus on technology.

With the constitutional amendments at the NPC, President Xi could stay in power beyond 2023. It is positive for the Chinese economy as it will facilitate continuity in terms of policymaking and maintain the momentum of likely upcoming comprehensive longer-term economic and political reforms, even against a backdrop of higher volatility and inflation. On the economic front, the government could implement more reform policies to further restructure the economy, stimulate more balanced growth, reduce poverty, raise labour productivity through technology, and contain risks in financial sector debt. 

Recent appointments made at the NPC, including Liu He, Dr Yi Gang, Liu Kun and Guo Shuqing, suggest a pro-reform stance, but under an umbrella of policy continuity. With reform-minded leaders in charge of China’s economic affairs, Deutsche Bank WM thinks that the government will remain committed to moving towards free trade and market economy principles. The bank believes there will be more liberalization in China’s service sectors, especially financial services and capital markets.

Deleveraging remains a key government policy in 2018. However, the deleveraging focus is likely to shift from the financial sector to the real economy, especially less-transparent infrastructure-related credit and non-mortgage household loans. With a positive economic momentum since the start of the year, Deutsche Bank WM thinks the government is now ready to reduce fiscal stimulus to the economy, as has been shown in the lower fiscal deficit target for 2018. It thinks consumption and exports will be the key growth drivers of the economy. The debt-intensive infrastructure and property investments should see a deceleration in growth.

The six key investment themes in 2018 are:

  • economy sectors continuing to slow
  • New economy sectors remaining key growth drivers
  • Further deleveraging to reduce financial risks
  • Industrial consolidation
  • Higher CPI inflation but lower PPI
  • Higher volatility due to external factors.

Tuan Huynh, Chief Investment Officer and Head of Discretionary Portfolio Management, Asia Pacific, at Deutsche Bank WM, said, “Based on the key investment themes, we like the IT/e-commerce, banks, healthcare, insurance and consumer staples sectors. We have a neutral view on the property sector. We hold a cautious view overall on Chinese credit this year, because of the likelihood of higher US yields and heavy new supplies in the market. We think the CNY is likely to weaken against the USD later this year, as the Fed delivers rate hikes and China’s current account surplus narrows.”

Key risks to China’s economy in 2018 include:

  • The spillover effect of slower economic growth
  • Higher inflation risks
  • Higher volatility in the global financial markets
  • Housing market uncertainty
  • Trade frictions with the US 

Huynh added, “Future reforms may not fully resolve the longer-term issues facing China, such as the demographic challenge, how to exit the middle-income trap, and how to deal with geopolitical tensions with Japan and the US, given its growing economic capabilities. However, we think that China is well-placed to face these challenges as its per capita GDP rises, and believe that it can become a high-income economy in the next five years: vindication for President Xi, if he needs it.”