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China sets 7% growth target: Implications for Australia and commodities

Date: Apr 08th, 2015

By AMP Capital Markets

The new target is in line with China's plan to guide the economy towards slower and more sustainable growth. In this article, we provide an update on the Chinese economy and explore what this means for investment markets.

In March, the annual National People’s Congress (NPC) took place in Beijing and the much anticipated economic targets were announced by the Central Economic Work Conference (CEWC). There weren’t any real surprises in the targets, but there are a few items worth noting:

  • Fixed asset investment growth target of 15% seems somewhat ambitious given structural headwinds in the form of overcapacity and overbuilding; while the retail sales growth target of 13% may also be hard to hit.

  • The inflation ceiling of 3% looks manageable, particularly given deep and persistent producer price deflation. In that respect, there is plenty of scope for monetary policy accommodation to support growth.

  • The property market is critical to the overall view for China given the downside risks linked to property and the flow-on effects to the broader economy. So it was encouraging to hear out of the NPC that the authorities would look to support stable housing demand. This is important because the property sector is presently in a cyclical and structural downturn, so if the authorities can stabilise the property market it will go some way towards addressing some of the downside risks.

  • Reforms remain a priority, but reforms are often costly in the short-term. So China needs to maintain a baseline of growth while undertaking the difficult and bold reforms that are necessary to ensure more sustainable growth and foster the progression and transformation of its economy.

China’s growth target in context

Source: AMP Capital, Bloomberg, As at 31 March 2015

What does this mean for Chinese shares?

After a frenzied 90% gain from the June 2013 low, Chinese shares listed in China (A shares) are no longer cheap. However, they still represent reasonable value against their historic performance. Chinese companies listed in Hong Kong, or H shares have lagged in the recovery. As such, they may offer better value than A shares in the way of price-to-earnings ratio (PE) – see chart below. Overall, both mainland and Hong Kong-listed Chinese shares offer good return prospects for investors as they stand to benefit from further monetary easing and capital market reforms.

Valuations not excessive versus history, but H shares are cheaper than A shares

Source: AMP Capital, Bloomberg, As at 31 March 2015

Implications for Australia and commodities

While growth in China has slowed since the previous decade, China is still consuming large quantities of commodities. In fact, Gross Domestic Product (GDP) growth of 7% today is equivalent to about 14% GDP growth a decade ago as the Chinese economy has more than doubled in size over that period. A key issue for Australia is that the supply of commodities has now caught up with demand and this will continue to weigh on commodity prices going forward. The good news though is that the risk of a hard landing in China remains low and so a collapse in commodity demand is unlikely. The property sector remains a swing factor in commodity demand.

China property outlook is important for commodities

Source: AMP Capital, Bloomberg, As at 31 March 2015

Final thoughts

More broadly, the data in China has been particularly weak so far this year, supporting the case for further monetary easing and government spending. The Chinese property market merits close watching due to its importance for the outlook in China and commodities.

About the Author

Callum Thomas, Investment Strategist at AMP Capital is responsible for researching a range of asset classes and global macroeconomic themes to aid in formulating investment strategies across the Multi-Asset Group.

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