Investors are getting Xi’s new China wrong again
TALK of China’s cratering economy and its grim future is obscuring a more nuanced shift that’s underway.
There’s no doubt headline data in recent months has been dismal. The country’s bread-and-butter exports have been weak as global demand wavers.
Real estate, which once accounted for as much as a third of gross domestic product, remains a significant problem that Beijing is trying to address.
President Xi Jinping’s insistence on zero-covid – although now easing – got in the way of productivity.
This bad news shouldn’t, however, fool investors who got Xi’s swift change of tack so wrong. It’s no longer about whether he can turn this around.
Rather, it’s worth assessing if Beijing’s ambitious efforts to boost and finance industrial technology and manufacturing will replace the lost mojo from the shrinking property sector and, to a lesser extent, exports.
To do that, it’s important to dig a little deeper, where you’ll find the reality looks significantly different.
Investment in high-tech manufacturing sectors grew by over 23% in the first 10 months of the year and was much higher than government spending in other industries.
It rose by almost 30% in areas like electrical and telecom equipment.
Overall research and development spending is also rising, as it is on a per-worker basis.
Revenue of companies that make machinery for solar cells, cellular network towers, factory automation and lithium battery are growing sharply.
Despite Xi’s moves to rescue the ailing property sector and soften still-stringent Covid measures, investment in areas like construction, railways and textiles – once among the largest contributors to growth – are unlikely to carry the economy as they did in the past.
Real estate’s share continues to decline, with outlays falling 8.8%, data released last week shows.
The shift toward making better and more valuable goods isn’t new – just underappreciated.
Xi has been focused on higher-quality growth with industrial policies like the controversial Made in China 2025 that aggressively pushed technological self-sufficiency, and the latest five-year economy blueprint that targets key industrial technologies and areas.
These sectors are now adding more value to the broader economy, helping offset the impact of the once-gargantuan real estate portion.
While every one percentage point drop in real estate outlays, on average, reduces gross domestic product growth by 0.13 percentage points, according to Bloomberg Economics estimates, heavy investment in high-quality manufacturing will plug the gap.
In addition, Beijing can control the descent, as it did in 2008 and 2015, even if it is painful in the near term.
Companies are spending more to keep up with this policy focus. A recent UBS Group AG survey of chief financial officers in China showed that firms are now thinking about increasing manufacturing capital expenditure.
They may not be laying out large amounts of cash indiscriminately but they are allocating money to upgrading equipment, research and development, building secure supply chains and moving up the technology ladder.
Take a look at excavator maker Sany Heavy Industry Co’s facility in China and it’s clear factory automation has been a priority area for Beijing.
It’s now able to churn out higher-tech machines that have found a huge market overseas, contributing to China’s rising excavator exports, even though domestic demand has been tepid.
Meanwhile, Shenzhen Inovance Technology Co, maker of advanced manufacturing equipment like motors and controllers, is competing with global players including Siemens AG and Japan’s Omron Corp, with their market share growing over the past five years.
At this point, investors should accept Xi isn’t going to let go of the economy after he just secured his third term, and instead focus on avoiding another miscalculation on China.