It must be spring as the 4th session of the 12th National People’s Congress (NPC) commences this weekend. The NPC is the highest organisation of state power and largest parliamentary body in the world with just under 3,000 delegates from across China attending the 10 to 14 day event. Members include the Party, government, military and groups of society. The NPC’s main objective is to provide a forum for debate on: past and present government policies, new laws, the budget and personnel changes. The NPC and the National Committee of the People’s Political Consultative Conference (CPPCC), the advisory body, are timed to occur together and are often jointly referred to as “Lianghui”, or two assemblies.
High up on the agenda will be the approval of the 13th Five Year Plan, which is designed to push towards a more affluent society by 2020. China aims to double its 2010 GDP per capita in real terms; for this to happen annualised GDP between 2016 and 2020 cannot fall lower than 6.5%. With this in mind, back in December 2015, policymakers listed 5 aims for 2016: reduce overcapacity and housing inventory, deleverage, cut operational cost amongst corporates and expand supply.
Policy focus will be on steel and coal, the main overcapacity concerns. To this end, in February, the State Council set up goals to reduce both. What will need to be discussed is the repercussion on economic growth; one of the reasons for the softer PMI readings this year. In terms of housing, the government has already implemented a number of initiatives on housing sales, including abolishing purchasing restrictions outside Tier-1 cities, reducing mortgage loans and cutting taxing on housing transactions to name but a few. These measures seem to have filtered through, as housing has started to gain momentum in Tier-2 cities.
GDP is expected to be lowered to between 6.5-7% this year; we expect further investment in infrastructure projects, upgrades in technology and energy advancements. Fiscal and monetary policy will be delivered in a “prudent with slight easing bias”. In fact the central bank Governor Zhou stated last week that, “China still has some monetary policy space and multiple policy instruments to address possible downside risks”.
Despite Moody’s revising ratings on 38 SOEs yesterday, to negative from stable, following the announcement on China's long-term credit rating last week, we remain comfortable within our holdings in China. Our positions in these quasi-sovereign names are some of the best performers so far this year and continue to offer attractive risk-adjusted expected returns for single A to double A ratings. An issue in state-owned CNOOC maturing in 2023, rated Aa3/A+ offers an expected yield and return over 11% and trades with a 4 notch cushion while Korea's National Oil Corporation 2024 issue, with a similar rating only offers 4.5% return and yield, with only 1 notch of protection. We will continue to monitor these outperformers and will look to rotate into issues which have underperformed, thus offer high risk-adjusted returns.