WE THINK: Do not underestimate Chinese government’s determination

2023’s State Council’s Meeting came earlier than last year. While July’s capital market has seen significant rebound from bottom (CSI 300 up 4.48%), market has yet to show its vote of confidence until the announcements were made. Market responded rapidly, from 25th to 31st, soaring 5.5% and showing its confidence towards the results of the Meeting.


In this edition, we would focus on the details of the meetings, its effects to the real economy and the capital markets.


The content of the meeting notice is encouraging: While it addresses clearly the economic hardships (e.g. weak internal consumption, difficulty in business environment, downside risks on important sectors, etc.) The government is determined to increase its influence in the macro management to stimulate domestic consumptions, and tackling unemployment has increased its priority to strategic level of importance. The meeting has also announced policies towards capital market, real estate market, local governments’ debt issue etc. that has all exceeded the market’s expectation.


From the notice we can clearly see that the government has shown its determination in tackling the most critical issues mentioned, suggesting the previous few months’ time to researching and understanding the problem were well spent. We would focus our discussion in the following three points:

1. To improve the capital markets activities and uplift the investor’s confidence


While previous meetings focused on reforms and stability, it is the first time in 30 years from my personal experience to see the meeting using wordings so explicit towards its goals. While there are multiple interpretations from the markets, we tend to follow one paragraphed published by the “Economic Daily” said, “the only way to boost spendings and consumption, is to let the people have extra money in the pocket. If we want to boost our consumptions, we must make sure the people have better ways to earn extra – from investing funds to stocks, once the people can earn extra from capital markets, then they would have increased spending power, and the will to spend. From this point of view, to make sure that the capital markets performing is essential to rebuild our domestic consumption market.” We believe that this paragraph summarizes what the stance of the government is towards the capital markets. Now the next question, do you believe in it?


Recent market performance has seen investor’s struggle in believing whole-heartedly. This phenomenon can also be seen in investor gatherings I had, where most investors are still doubtful. But this might not be a bad thing.

2. Real Estate market has seen material changes


There’s also a significant change in the Notice for the real estate market, where we expect a gear shift in policy would happen. We have been mentioning real estate sector for the past year and more because of its significance in Chinese economy. Since the fall of Evergrande in 2021, new home sales have been dropping (both price and volume), liquidity becomes an issue to all privately owned developers, causing much less land buying activities in third to fourth tier cities.


Companies like Sunac has given up and many projects are put on halt as a result of the liquidity issues continues. Despite the efforts made to boost confidence, the restoration of the real estate market would not be an easy task, especially for those privately owned developers (as compared to SOEs, private owned developers seen more severe drop in sales in 2023); At the same time, demand-side has been hurt severely too, with COVID affecting the mass affluent’s income in the last 3 years, lowering real estate’s future growth expectations. The leadership is showing signs of loosening from the Notice, suggesting that they recognize the problem and we expect new loosening policies would be in place soon afterwards. Whether or not the market would rebuild itself would not only depend on policies but also the recovery of economy.

3. To resolve the local government debt issue


The local government debt issue has already become a problem to China’s economy if we do not handle it properly. From a citizen’s point of view, financials of local governments are hardly ample – some cannot even pay their civil servant’s payroll. The problem enlarges when local governments cannot sell their land, which was the largest revenue source for many. We believe that if the central government does not step in, such debts from local governments would cause systematic risk to the country. The notice mentioned that the central government should indeed step in and resolve the local government debt is indeed a very good sign. Even Ray Dalio from Bridgewater once said, “debt was never an issue as long as the government is determined to solve it. The deleveraging process would become so much easier”.  


This year’s meeting has been clear: continue to prove stable monetary policy, consumption-led economic recovery, government taking lead in investments, local government debt-raising for specially approved projects…  


The previous researches are well paid off. The meeting has set clear objectives to tackle the problems in China. While the real estate problems, economy and unemployment would all take time to digest the issues, we believe that if the country can come together and put ourselves behind the greater goal, then we would see recovery, starting from the capital markets, very soon. 

Market updates and strategy


While Wallstreet says “don’t fight the Fed”, in China we say “follow the Government”. We must pay attention and understand the latest policy developments if we want to be successful in Chinese investments. Especially right now where the market valuations are still cheap, yields are attractive, investor’s confidence are lows and fund sales are in its hardest time in years. All these are typical phenomenon when market is at bottom, and now together with a determined government to make changes to stimulate the economy, we think one should pay high attention to this notice’s importance.


On July 20th, when I was in Wuhan conducting an investor seminar, we’ve reiterated a phrase, “don’t chase our fame at peak; don’t leave at trough”. This is a phrase that we once used in 2018. We see a lot of similarities in 2018: we do not know when will this bear market end, in what form and how quickly, but we understand clearly that if you chose to leave and exit at the trough, you would only invest again at the peak. This itself is a part of market cycle, as well as difficulties and hardships of the market.


While others may hold a different point of view than ours, we are dedicated to follow the government’s call-to-arms and start switching our portfolio into a more aggressive stance with higher portfolio weighting. 


Best Regards,


WU Weizhi

August 5th, 2023



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