How has the Two Sessions Shaped the Opportunity in Hong Kong China Equities?

On March 13, China’s senior state leadership and policy roadmap for 2023 became clearer with the closing of the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC), or more commonly referred to as the “Two Sessions”. This is the largest state-level event since Beijing made a full pivot away from its zero-COVID policy—and one that was much anticipated by global investors after two years of lackluster market performance. Economic stability and growth were the key priorities of the event. In his final work report to the NPC, the outgoing Premier Li Keqiang outlined a number of targets for the new administration, including a 5% target GDP growth rate for 2023.

The growth target was on the lower end of market expectations, especially after a tough 2022 when economic activity was impeded by COVID restrictions and property market drags. While these factors are no longer likely to impact the market this year, global demand has weakened after more than a year of hawkish rate hikes by major global central banks. China also needs to boost its domestic consumption, and with a target fiscal deficit of around 3.0%—which is higher than the 2.8% target last year—it signals that the government is ready to commit to fiscal programs to support domestic economic growth in the coming months. Similarly, monetary policy is also expected to be accommodative, with moderate tolerance for price growth of around 3%. With policy measures ready to support weaker areas of the Chinese economy, we could potentially see actual growth figures in 2023 beat the target as China continues to recover from the pandemic.

The Two Sessions brought forward a number of changes in regulatory bodies, including an overhaul of the financial regulatory system. A new regulatory agency, the National Financial Regulatory Administration (NFRA), will be established and will absorb the China Banking and Insurance Regulatory Commission (CBIRC), along with some of the responsibilities from the People’s Bank of China (PBOC) and the China Securities Regulatory Commission (CSRC). The new arrangement would help to improve regulatory oversight on the increasingly complex financial markets. Meanwhile, the PBOC would continue to steer China’s macro and monetary policies, while the CSRC would strengthen its focus on the regulation of the securities market. The official position of the NFRA and CSRC will also be elevated and become directly administrated by the State Council, strengthening their supervisory power and functions. Additionally, a National Data Bureau will be set up to coordinate and promote the development and utilization of China’s digital economy. Finally, a number of functional shuffles were made to restructure the institutions related to addressing the aging population, improving the intellectual property management system, and reducing staffing in central state agencies.

While some of the senior state leadership moves have been expected since the 20^th National Congress of the Communist Party of China in October 2022, such as Li Qiang replacing Li Keqiang as Premier, the new administration retained Yi Gang as the Governor of the PBOC in an effort to provide policy continuity as perceived by the market. Yi is a reform-minded technocrat, who has been educated in the U.S., and credited for his successful management of monetary policy during the pandemic. Elsewhere, the Finance Minister Liu Kun and Commerce Minister Wang Wentao will also retain their posts.

In the first press conference held by the new Premier Li Qiang, he has reiterated the government’s focus in his upcoming term, which has been mostly extensions of current policies. Li stressed the importance of economic stability in 2023, and the slew of policies will be introduced to stimulate domestic demand and investment, as well as reform and innovation, and to mitigate risks. The Chinese government is committed to shifting its focus toward high-quality development and improving science and technology to achieve self-sufficiency. This will likely support the health care and information technology sectors where research and development are key to building competitiveness. The new administration will also continue to pursue China’s policy to open up its economy, welcoming foreign businesses and investors. Li also reiterated China’s position that Hong Kong and Macau are important elements of the country’s strategy, and their respective positions are “strengthened and consolidated” with the backing of the central government to integrate their economies into China’s overall development, as well as to grow their economies and livelihoods and strengthen their global competitiveness.

The Barings’ public equities team is constructive on the news and policies coming out of the Two Sessions in 2023. We believe there has been an effort to ensure economic stability and policy continuity in President Xi’s third term. In our view, the GDP growth target of 5% looks achievable by a combination of organic economic recovery and policy support, and we will continue to closely monitor various economic indicators. We will also continue to identify companies with attractive fundamentals that are positioned to benefit from the structural growth opportunities unfolding in the region—including sustainable growth, self-sufficiency in the supply chain, scientific and technological innovations, and environmental awareness. This will likely bolster the outlook on sectors and themes such as new infrastructure, domestic consumption, health care, technology localization and sustainability in the medium to longer term.

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