It’s official: China’s growth is slowing and ironically that is creating opportunities for investors.
Premier Li Keqiang last week unveiled a GDP growth target of "about 7%" in 2015 down from "about 7.5%" in 2014 and actual growth of 7.4%.
Li was speaking at the annual plenary session of the National People's Congress (NPC) on March 5, which lays out the Chinese government's objectives, work priorities, and budget plan for 2015.
The more modest growth forecast, which was decided late last year but only formally made public at the NPC, showed that Chinese leaders are weaning themselves off their growth obsession.
This is positive long term for the economy as it means less debt-fuelled growth. But even 7% is ambitious and assumes that thorny, deep-rooted reform of the economy will happen quickly and smoothly.
Many of the reforms laid out in the ‘Government Working Report’ by Li will create opportunities for investors, foreigners and domestic, to participate in China’s expanding financial markets.
A key plank in China’s financial reform agenda is the opening up of its stock markets. In the wake of the launch of the Hong Kong-Shanghai stock connect scheme, China is adding a Shenzhen-Shanghai link later this year.
“The Shenzhen-Hong Kong link quota will be of a similar scale to that in the Shanghai-Hong Kong scheme,” said one source close to the Shenzhen Stock Exchange.
Foreign investors have flocked into A-shares as China eased monetary policy. The Shanghai-Hong Kong Stock Connect Scheme helped them gain access to a 35% leap in the benchmark Shanghai Stock Exchange Composite Index since its launch.
Investors will also likely have more companies to choose from as China switches from its cumbersome and unpredictable IPO approval-based system to a simpler registration-based method.
The country’s securities watchdog China Securities Regulatory Commission will trial the registration-based system in June, according to multiple sources familiar with the situation.
Among all the capital market reforms, the overhaul of A-share IPOs is a government priority, according to Haibin Zhu, chief China economist at JP Morgan.
“The reform signals that the CSRC is willing to loosen its grip on new listings and ease restrictions, which is an important step towards building a mature and stable equity market for capital-raising,” said a Beijing-based senior banker at a large securities house.
Recent reforms are signalling the government’s urgency. The regulator said in March that it would allow issuers that haven’t recorded any profit to go public, according to a statement of the CSRC spokesman.
“This means some issuers with high growth potential, like technology or healthcare companies, may go for the A-share listings rather than overseas IPOs,” said a banker in Shenzhen.
Private capital
Private equity firms will find companies more willing to team up on cross-border deals after Li made it clear he wants to accelerate Chinese companies’ push overseas and to reform state-owned enterprises.
Chinese enterprises will participate and bid for overseas infrastructure projects, especially in the railway, electricity, communications, machinery, airlines and electronic equipment industries, according to Li’s speech.
“This should be favorable for infrastructure-related sectors,” said Ting Gao, UBS wealth management’s China economist.
To be sure, the working report usually only offers general guidelines. For example, the report didn’t give much clarification on how China would further advance the state-owned enterprise reform.
The SOE reform has been a hot topic since the Third Plenary in November 2013 highlighted it as a way to introduce private capital into SOE, hoping to improve their corporate governance and efficiency. However, the pace of the SOE reform hasn’t gone as quickly as investors has hoped — only two or three SOEs sold stakes to investors last year.
Meanwhile, the government will continue liberalising the domestic bond market by allowing more corporate bond issuance and further reducing debt financing costs, according to the government report.
“The development of the bond market is not only just driven by the regulators, but also by the market need,” said JP Morgan’s Zhu noting that recent monetary easing has stimulated demand for cheaper financing.
In one area China's leaders may be back pedalling: local government bonds.
“The tone on local government financing reform sounds more moderate, suggesting that progress on local government debt control may be slower than we earlier thought,” said Yang Zhao, chief economist China at Nomura.
Zhu estimated that local government debt would continue to expand all be it at a slower pace versus the average annual increase in 2012 to 2014.
China’s leaders are right to accept a ‘new normal’ phase of growth but much reform is needed to keep the economy on track. Investors are poised to participate.
