China/Hong Kong Market Pulse: Central Financial Work Conference Unveils Near-Term Bullish Signals

China/Hong Kong Market Pulse: Central Financial Work Conference Unveils Near-Term Bullish Signals

Macro 5 minutes to read
Redmond Wong

Chief China Strategist

Summary:  The 2023 Central Financial Work Conference, led by General Secretary Xi, unveiled significant shifts in China's financial policies. It highlighted five core principles, notably omitting the term "deleveraging" and indicating a willingness to support local governments and the property sector. The reduced emphasis on "risks" and the increased focus on the housing sector implied a more accommodative stance. However, the conference signaled a retreat from marketization, giving prominence to governance and anti-corruption efforts. Concerns have arisen about China's productivity and development strategies. In terms of investment, a positive outlook is anticipated for mainland and Hong Kong stock markets, with the potential for a notable Q4 rally.


Key Points:

  • The Central Financial Work Conference indicates notable changes in China's financial sector strategies.
  • Five fundamental principles were emphasized, focusing on Communist Party leadership, serving the real economy, supply-side structural reform, risk management, and governance improvement.
  • The conference refrained from using the term "deleveraging" compared to its 2017 counterpart, suggesting a shift in priorities.
  • The mention of "risks" was reduced, while the housing sector and fiscal support received increased attention.
  • The conference tentatively signaled a move away from marketization, prioritizing governance and combating corruption.
  • Investment implications include a positive near-term outlook for mainland and Hong Kong stock markets.

Introduction

The Central Financial Work Conference, held on October 30 and 31 and chaired by General Secretary Xi, stands as a pivotal biennial event in the People's Republic of China. This gathering represents the paramount assembly of the Communist Party of China, dedicated primarily to shaping the nation's financial sector governance and charting the strategic course for financial system management. Notably, the 2023 conference marks a departure from the 2017 National Financial Work Conference, as it eliminates the term "deleveraging" and shifts focus towards "optimizing the debt structure." This transition has raised intriguing questions regarding China's financial future, its impact on the real economy, marketization, and investor sentiment.

Key Principles from the Central Financial Work Committee

The Central Financial Work Conference represents the apex of the Communist Party of China's leadership in financial sector governance and the strategic direction of the financial system. In 2017, at the last conference then known as the National Financial Work Conference, China initiated a deleveraging campaign targeting the property sector, shadow banking sector, and local government debts. The conference was originally scheduled for the previous year but was postponed. The conference's official statement emphasized five fundamental principles for managing the financial system: 1) the leadership of the Communist Party of China, 2) serving the real economy and the people, 3) structural reform of the supply side, 4) risk management, and 5) improving governance while combating corruption.

Near-Term Bullish Signals

The 2023 conference diverged from the 2017 event, which prominently featured "deleveraging," as the term is conspicuously absent in the latest readout. While the 2017 statement stressed "strictly limiting the increase in local government debts," the 2023 statement focuses on "optimizing the debt structure of central and local governments." This shift may indicate a willingness by the central government to shoulder a greater fiscal burden to alleviate the financial stress of local governments. Recent actions, such as the approval of RMB1 trillion in additional central government bonds for natural disaster prevention and rehabilitation projects, suggest China is moving in this direction.

The mention of "risks" has also decreased to 16 times in the 2023 conference readout compared to 28 times in 2017. The 2023 readout mentions the housing sector four times, emphasizing macro-prudential risk management, liquidity circulation between the financial system and the housing sector, fund usage supervision, and equitable treatment of state-owned and privately-owned developers. This suggests a more accommodating stance compared to the previous conference's strict approach to highly leveraged property developers. Recently, the Shenzhen State-owned Assets Supervision and Administration Commission of the State Council (Shenzhen SASAC) and the Shenzhen Metro pledged support to Vanke, a leading Chinese developer.

Potential Retreat from Marketization

In 2017, the conference pledged to enhance the market's “decisive role in resource allocation”, protect investor interests, and promote the development of small and medium-sized privately owned financial institutions. These pro-market policy stances are notably absent in the 2023 readout. Instead, the emphasis is on combating corruption and improving governance and supervision of the financial system. The readout explicitly highlights the political nature of financial system management. If implemented, these changes may indicate a shift away from marketization in China's financial system, favouring a smaller number of large state-owned banks and financial institutions.

As we have consistently emphasized, one of China's key challenges in boosting its long-term growth potential is improving productivity. This extends beyond technology and innovation and involves the elimination of inefficiency in resource allocation in economic activities. The subtle message conveyed in the 2023 Central Financial Work Conference suggests China may be heading in the wrong direction in this regard. However, much remains to be seen in the coming weeks as additional policies are rolled out, and notably, the direction taken by the Third Plenary Session of the 20th Central Committee of the Communist Party of China, poised to be held later this year or early next year.

Investment Implications

Despite concerns about a potential retreat from the initiatives of enhancing marketization and support for small and medium-sized financial institutions, the absence of emphasis on deleveraging in the 2023 Central Financial Work Conference paves the way for more supportive financial and fiscal measures for local governments and the property sector in the near term. The mainland and Hong Kong stock markets are likely to benefit from this development in Q4, potentially leading to a significant year-end rally. China internet stocks, trading at an average of 14x forward earnings, offer a high-beta approach to position for a broad market rally with reasonable margins of safety.

Conclusion

The 2023 Central Financial Work Conference reflects tentative changes in China's financial strategies. The omission of "deleveraging" in favour of supporting local governments and the property sector is a notable shift, but concerns about productivity and resource allocation persist. The direction of China's long-term development strategies will be shaped by the Third Plenary Session, and investors should carefully evaluate the implications of these developments, with opportunities expected in mainland and Hong Kong stock markets, as well as Chinese internet stocks in the near term.


Quarterly Outlook

01 /

  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

None of the information provided on this website constitutes an offer, solicitation, or endorsement to buy or sell any financial instrument, nor is it financial, investment, or trading advice. Saxo Capital Markets UK Ltd. (Saxo) and the Saxo Bank Group provides execution-only services, with all trades and investments based on self-directed decisions. Analysis, research, and educational content is for informational purposes only and should not be considered advice nor a recommendation. Access and use of this website is subject to: (i) the Terms of Use; (ii) the full Disclaimer; (iii) the Risk Warning; and (iv) any other notice or terms applying to Saxo’s news and research.

Saxo’s content may reflect the personal views of the author, which are subject to change without notice. Mentions of specific financial products are for illustrative purposes only and may serve to clarify financial literacy topics. Content classified as investment research is marketing material and does not meet legal requirements for independent research.

Before making any investment decisions, you should assess your own financial situation, needs, and objectives, and consider seeking independent professional advice. Saxo does not guarantee the accuracy or completeness of any information provided and assumes no liability for any errors, omissions, losses, or damages resulting from the use of this information.

Please refer to our full disclaimer for more details.

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992