Five Per Cent Growth, 12 Million Jobs Planned and A Trillion Renminbi Bond: What Not to Like About China?

During early spring the Chinese government discussed the health of the domestic economy and outlined its plans for several years to come. For 2024, the government projected a modestly bullish 5% GDP growth target, above what many onlookers gauge reasonable.

Xiaolin Chen, Head of KraneShares International, sat down with Andrew Wilkinson to explain why she believes the domestic economy is ripe for strong growth following the National Peoples’ Congress.

Summary – IBKR Podcasts Ep. 146

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Andrew Wilkinson 

Welcome to this week’s podcast. My name’s Andrew Wilkinson. During March, the National People’s Congress and China Development Forum concluded their discussions about China’s economy. Here to discuss the implications of those meetings is Xiaolin Chen, head of International at KraneShares in London. Welcome, Xiaolin. 

Xiaolin Chen 

Thank you, Andrew. Thank you for having me on your channel. 

Andrew Wilkinson 

This is your first time on IBKR podcast. A huge welcome. Let’s get straight into the discussion. In light of those latest pivotal developments, how do you think such discussions are shaping investor sentiment and market dynamics in China? 

Xiaolin Chen 

Right. Thank you, Andrew. I think March marks a very important time for this year, particularly this is the second year of President Xi Jinping’s third term. This NPC National People’s Congress and China Development Forum just concluded in this month in March, are very important meetings to reassure investors globally what the key agenda for the Chinese policymakers is for this year and years to come. This obviously gets a lot of spotlight from a global investor stance. To me, my 1^st take on the NPC, the National People’s Congress, is that Premier Li has clearly stated the GDP growth target for China is set around 5% this year.

He and his team are aiming to create new jobs of 12 million. He’s going to create new jobs for 12 million people. And they are planning around 3% of GDP as physical budgeting. They also stated that they started to issue 1 trillion renminbi bond, or ultra long dated bond, to support the economy. “to start with” is the key. If [it] shall [be] needed, it indicates they are ready to issue more bonds. Lastly, and most important is they continue to commit from what they committed last year is to make sure all the policies that are centered around for corporates, either state-owned or private companies, are very accommodative for them to grow. That’s to me is one. [The] Economy is back to front and center to the Chinese policymaker or governments agenda. That’s number one. Two, liquidity, physical monetary policy are all going to stay very accommodative. Lastly and most importantly, they are willing to do everything they can to support the economic growth. 

So, following the NPC concluded middle of March, they now hosting the China Development Forum Not only they invited domestic people, domestic policymakers, ministries to attend, they also invited people from around the world, like top CEOs that have business or are doing business with China, to attend at the moment. The take from the visitors, namely the big bosses of corporations from around the world, if I may use Apple CEO Tim Cook’s comments that he made yesterday after he attended China Development Forum. He said, “China is really opening up. I am very happy to be here”. I think he realizes that China is setting a very pro-market, pro-growth, pro-international investment environment for all the corporates to come back and continue to stay invested in China. 

Andrew Wilkinson 

Xiaolin 5% [GDP growth], do you believe it? Do you think that’s attainable and why or why not? 

Xiaolin Chen 

5% is in my opinion, they can beat that target, no problem. The reason I say that is because, one, liquidity is so sufficient, there’s trillions and trillions of available liquidity in the system. Liquidity is not [the] issue. Policy stays accommodative to growth and 5% is not going to be very challenging. In my opinion that 5% set is very conservatively. The reason for that is China is aware of at least two or three key issues. Namely one is this is probably the biggest election year in the world this year. So, they factor in a lot of geopolitical potential issues or potentially uncertainties that they need to figure out who are their partners or counterparts on the other hand, to deal with.

So, they are factoring in a lot of the geopolitical uncertainties around that. Second, they don’t expect any restriction. All challenges being put on China in growing certain sectors, [e.g.] EV, semiconductors to be removed immediately. Domestically, they also face continuation of real estate sector to continue to consolidate. So, they [are] factoring external restrictions. Domestically, the restriction they may face, [is] challenge of consolidating, consolidating real estate sectors with all of that into one. They set a 5% target. Is 5% sufficient, Andrew? Yes. Why I say that is their goal at the beginning of this term is to make sure China can achieve urbanization and modernization that 5% will help them to achieve their goals, no problem. 

Andrew Wilkinson 

So, given the directions from the NPC, which sectors are most attractive and how can investors capitalize on them? 

Xiaolin Chen 

Great question. One term that gets mentioned or repeatedly mentioned or get picked-up by media right after NPC concluded was, President Xi’s speech mentioned a new productive force. Everyone was trying to figure out what does that really mean as a new term? Very clearly, is along the theme of the two key themes. One, urbanization, second modernization. What sectors will help China to achieve that? Namely, , clean technology, hydrogen technology, solar panels. I think we all know, your audience from your channels also know, 95% of the solar panel produced today worldwide are from China. Those manufacturers are from China. They are very much front and center having green, clean technology which you want them to be. Because they are the largest emitter in the world. They have to lead by example, set by example.

Let those corporate deal with the challenges first, then they can really sincerely deal with their carbon issue. Electrical vehicle in China is the largest EV car maker now. They produce the most. They sold the most. They also bought the most. I think those sectors continue to be in favor. But there’s another policy that [was] repeatedly mentioned at NPC was the Consumer Goods Exchange Program. What do they really mean by that?  [You] have an old TV used for 20 years? You don’t buy a new TV; they say come forward. We’ll price your TV at reasonable price. We exchange you for a new one, Or a car. You have a petrol car. You want to change to a new electrical vehicle car? Come forward. The compensation gap will be a lot less if no such program is in place. They value your [goods] at a reasonable value. They reduce a bit on the electrical vehicle cost, so the gap, the difference you pay is marginally manageable. A lot of those programs in between, so I say consumer related sector, consumer power would be the next one to watch as a sector to benefit from this round of economic growth. 

Andrew Wilkinson 

What approaches should investors adopt to diversify their portfolios amidst the evolving investment landscape? 

Xiaolin Chen 

That’s a great question Andrew. I think China, [as] we know, is the second largest economy in the world. We know the economic importance of the country as to the rest of the world, number one. Number two, [China] is still a country that is an emerging country, which means there’s a lot of education, such as your channel. It’s very important to provide investors this kind of information for educational purposes for clients and investors globally to understand that culture: why you do NPC? why NPC is important at all? And then how can I benefit from such, which I really like the flow. So, how you benefit, to me, [China] is the second largest economy in the world, like it or not, we got to have a leg in. We may not put all the eggs into one basket. We should have some exposure to China. So, you know when the country starts to get back on its feet and starts to rebound, you have some exposure to those companies or sectors that we just discussed early on: Electrical vehicle, clean technology and consumer play. I’d say those three sectors, [a] lot of people say that’s sector, that’s theme.

In China, those are the themes [that] last for decades. In many ways when you allocate to China, of course, if you have a benchmark, you allocate to beta. If not, as an investor, I’d strongly suggest some of the interesting theme happening in China, as an investor I want to get exposure to it like I see some of the Chinese car makers make their footprints to the UK today. It is lovely to see them exhibit their cars in the shopping mall for us. Now they come to our doorstep. In return we should benefit from that revenue they are generating from ours by us investing in those stocks. So, I say, keep a leg in; be diversified, be more exposed to the sector that materially matters for this economy to mature, to continue to grow, and the Chinese policymakers favored or pro-sector for the growth of the next year, if not decades to come. 

Andrew Wilkinson 

Xiaolin, China’s got a  big focus on green initiatives and sustainability. What are the emerging opportunities for investors there? 

Xiaolin Chen 

Absolutely yes. The reason I say that is it’s very rare for an economy that is growing dramatically at the same time recognizing the environmental challenge it has introduced to the world and also very proactively dealing with those issues at the same time. Though China is the largest CO2 emitter as a single country, they’re also the largest country that remains and stays very committed financially to deal with the problem. I give you one example. China committed over $500 billion last year to deal with great issues. European Union committed $526 billion across five years to deal with similar issues. So, just showing as a financial availability that China remains committed [and] continues to grow. So, this issue is front and center. That’s why when you invest in this green initiative, I surely say that there’s a huge opportunity happening in China because [of] the need. They are number-one polluter.

Second, because the financial support that the corporates got, they are incentivized to continue to develop the technology, continue to drive for the innovation happening in that sector. Therefore, it presented very fascinating investment opportunity like EV sector. A lot of the names in China, I think well known today, that they are really the number one smart car you know worldwide to be sold.

And I mentioned clean technology. Remember, I live in the UK. Many, many decades ago we exported waste [and] rubbish to China; let them process [our rubbish]. And then they use that 10-20 years to exercise in a very advanced technological way. Today, guess what, those Chinese companies are number-one waste process company. They use technology now we need to pay them a lot to get our rubbish recycled. Those companies are well worth consideration. And water and hydrogen. China produced the most clean technology worldwide in combination of any other countries and regions altogether. So, I think Green is the focus from top down and also the bottom up that present a lot of fascinating opportunities in these sectors. 

Andrew Wilkinson 

Xiaolin Chen, head of International at KraneShares in London, thank you for being a very enthusiastic guest. I feel so much more informed about what’s happening in China as a result of our discussion today. Thank you. 

Xiaolin Chen 

Thank you for having me, Andrew. 

Andrew Wilkinson 

So as always, listeners can learn more about an array of financial topics for free at IBKR campus. Follow us on your favorite podcast network, and feel free to leave us a rating or review. Thanks. For listening everyone.