China 2021: ‘Trust The Plan’

Xi Jinping’s goal of doubling GDP by 2035 implies 4.7% annual growth, and if you “trust the plan” — the plan is for 5% growth in 2021.

China’s stock market is beating the S&P 500 and clobbering Europe year-to-date. Bretton Woods Research, a big picture investment research firm, told clients in a report last week that investors should pick anything tech and pharma related in China. They highlighted two KraneShares ETFs, the E-Commerce and China Internet ETF (KWB) and China Healthcare (KURE) KURE . Both of those ETFs are beating the CSI-300 Index, which is tradable through the X-Trackers China A-Shares fund (ASHR) ASHR .

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China is a runaway train. It’s beaten back the pandemic while the G7 countries are behaving like the Keystone Cops — to lockdown or not to lockdown? Go to school, or don’t go to school?

Onto the numbers.

Exports, infrastructure investment and the consumption recovery will support the continued growth recovery through the coming winter. The vaccine story, which drives market bullishness here at home, will have only a limited impact on China growth as people there are telling me that no way will China be able to roll out a China vaccination plan for 1.2 billion paper. It’s not something the locals are clamoring to get a hold of, like they are Stateside.

Bo Zhuang, a China economist for TS Lombard is forecasting China 2020 GDP growth to be positive, at 2.1% this year. But he is more bullish than Xi and thinks 2021 comes in at 7.7%. If markets are not too far ahead of themselves, then China is a buy.

For the large firms in China, the economy is accelerating. But small and mid-sized businesses outside of the main urban hubs are still struggling due to the pandemic. This is actually similar to the U.S., though China’s economic plans are different.

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China is a centrally planned economy and is laser focused on its large, formal sector economic activity and not the small dumpling restaurant and dry cleaners in Hubei that got crushed in the first quarter of 2021 due to lockdowns.

What does it mean to trust the plan?

It means never bet against the People’s Bank of China. And Beijing’s orders to — as Brian McCarthy of Macrolens says — “keep the machines humming.”

Bank loans are “on plan”. Shadow banking loans are still shrinking, which was clamped down upon by Beijing years ago. They’re sticking with that, even now.

China is also using European and U.S. bond markets who are desperate for yield, and more invested in China as the big indexes add China debt to the benchmark in record weighting. The money is flowing in.

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As far as stimulus goes, China is not taking a Financial Crisis approach. They are just keeping the wheels moving, rather than over-stimulating. One reason is because there was no lockdown outside of Hubei province. There were stay at home orders nationwide, but essential workers were busy. Steel workers were busy. Cement mixers were mixing. Aluminum smelters…smelting. Plastic products, molding. Industrial robots, no stop. Printed circuits, no signs of any shutdowns from the production side.

These big sectors are largely tied to exports, and the Made in China 2025 plan, so mid market and small market companies are a total blackbox. This is why investors have to “trust the plan” on China — you stick to what Beijing is focusing on — big tech, big pharma, green tech and large exportables like electronics.

When it comes to China, their big picture production targets are the story. Made in China 2025 is the story.

That doesn’t mean the rest of the economy is humming on all four cylinders, but if Beijing’s not worried about it…

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“If economic growth in China was measured like it was in the U.S., they’d be posting negative growth like we are,” says McCarthy. “Their production based statistics look fine, but there was a severe disruption to small businesses and the consumers that is not measured in China. But I think this will mean inventory buildup and more overcapacity in the Chinese economy,” he says.

McCarthy is not sold on China, though.

“It’s been a great run for China. But the outlook for Chinese equities is poor,” he says, highlighting small and mid-sized companies, and its employees, that are not doing as well as the sectors cherished by Xi Jinping and the Chinese Communist Party.

China is still trying to deleverage its economy, but that will be dependent on the rest of the world placing orders of China manufacturing. “There is still some (pandemic) damage behind these strong statistics,” McCarthy says.

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