Want to play the world’s second-largest economy in a post-pandemic world? Think self reliance and domestic demand
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By David Rosenberg and Krishen Rangasamy
China has managed to come out of the global crisis in better shape than most, despite being ground zero of the COVID-19 pandemic. Restrictions and vaccination efforts by the Chinese government have arguably been effective in limiting new infections and allowing business to return to normal.
Output expanded further last year, contrasting with record contractions in other major economies, and the 2021 growth outlook also looks good relative to peers. So much so that the People’s Bank of China (PBOC) is one of the few central banks in the world that has tightened policy this year, consistent with the government’s plan to deleverage the debt-laden economy.
Headwinds & opportunities
The alteration of global value chains in the aftermath of the pandemic, geopolitical tensions with Western democracies, the relationship with Hong Kong and Taiwan, carrying the Belt and Road Initiative to fruition, an aging workforce and declining productivity all represent serious challenges for China over the longer term.
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The central government is hoping to address some of those with implementation of its five-year plan, a focus on supporting “homegrown” domestic demand, which will present some buying opportunities for investors in some sectors.
Another Five-Year Plan
The government made clear in its 14th five-year plan of its continued support for the economy over the long term. It aims to double real GDP by 2035 — i.e., annual growth averaging roughly five per cent over the next 15 years — using a so-called “dual circulation” strategy, which translates into China remaining open to world trade but putting greater focus on self-reliance.
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The deterioration in China’s relations with Western democracies (U.S., Canada, Australia, the European Union) likely motivated Beijing to adjust its growth strategy. High on the list of government priorities is transforming China into a powerhouse in technology and high-end manufacturing to become less reliant on foreign suppliers (e.g., semiconductors).
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Beijing is also aiming for the urbanization rate to climb to 75 per cent (i.e., like advanced economies) by 2035, which means investment in infrastructure should continue at a solid pace for years to come. Increased urbanization and related higher incomes are consistent with the government’s fundamental objective of rebalancing its economy towards consumption spending.
Investor opportunities
Beijing is countering those above-mentioned headwinds by investing heavily to rebalance and modernize the economy and rekindle productivity by moving up the value chain. As such, there will be opportunities for investors in areas such as high-end manufacturing, robotics and biotechnology.
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Digitalization of the economy also means opportunities in advanced information technology as e-commerce is expanded, and the use of new technologies such as 5G, big data and artificial intelligence becomes more entrenched.
The government’s stated objectives of peak emissions by 2030 and carbon neutrality by 2060 also translate into opportunities for green investment (e.g., renewable energy, carbon capture and storage). Consumer discretionary sectors also look to benefit as the consumption share of the economy increases in line with Beijing’s “dual circulation” strategy.
This column is condensed from a Special Report: How to Play China in a Post-Pandemic World, which is available at Rosenberg Research.
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