We recently returned from an investment trip to China and, as is usually the case, arrived home more confused than when we left. It’s easy to marvel at how precise the ‘China Experts’ are.
What remains clear is that policy matters in China, more so than any other country we have observed. Policy is typically communicated transparently and in recent times it has been strictly enforced.
The vast majority of Australia’s trade (and the ASX 200’s) links with China are via commodity exports and there were some clear messages communicated in President Xi’s 3.5-hour long speech at the recent National Party Congress that are worth reflecting on:
- China’s economy has been transitioning from a phase of rapid growth to a stage of high-quality development (NB – no GDP target was provided);
- “Housing should be for living in, not for speculating”; and
- “The CPC (Communist Party of China) has incorporated ‘Beautiful China’ into its two-stage development plan… characterized by harmonious coexistence between man and nature.”
The common thread is clear; boosting productivity, shrinking over-capacity, reducing environmental damage and slowing the housing sector are all in China’s long-term best interest. They are, however, not in the best interests of commodity exporters and as such we believe slower demand and lower prices are highly likely. There are a few exceptions though, with gas demand (in particular LNG) likely to be boosted by the pivot away from coal (currently estimated to be 70%+ of China’s power and the number one source of pollution from burning 3.5 billion tonnes each year).
We remain underweight resources and in particular coal and iron ore. The photos below demonstrate recent environmental restrictions have been ‘baby steps’ and whilst over-capacity still exists there have been some modest improvements.