China: the train of new development paradigm left the station two years ago China: the train of new development paradigm left the station two years ago China: the train of new development paradigm left the station two years ago

China: the train of new development paradigm left the station two years ago

Redmond Wong

Market Strategist, Greater China

Summary:  General Secretary Xi Jinping advocated a new development paradigm in a speech at a meeting of the Chinese Communist Party’s (CCP) Central Committee for Financial and Economic Affairs on 10 April 2020.


China’s train of economy has taken on a new track 

General Secretary Xi Jinping advocated a new development paradigm in a speech at a meeting of the Chinese Communist Party’s (CCP) Central Committee for Financial and Economic Affairs on 10 April 2020.  

One of the dimensions of the new development paradigm is to make China more self-reliant, not only in food security and energy, but also in reducing the importance of exporting low-value added original equipment manufacturer (OEM) products and increasing import substitution and export of high-value added ‘killer technology’ manufactured products. Xi noted that China’s ‘factory of the world’ development model, which relies on labour-intensive manufacturing, importing materials and exporting to overseas markets, has reached its limit and become inadequate in the midst of the emerging international trend of deglobalisation. With low fertility rate and an aging population, China’s working-age population peaked in 2015 and labour costs have been rising. I add that the export-driven growth model has run its course after four decades of success.  

A key concept of Xi’s new development paradigm is ‘dual circulation,’ which consists of domestic and international circulation. By boosting domestic demand and optimising production and the supply chain, domestic circulation is expected to become the primary driving force of the economy, while international circulation is supplementary.  

In case of extreme adversity, the supply chain of key elements that are critical to national security shall be able to function in close-circuit domestic circulation. A Go (an Asian board game) player, Xi emphasises the benefit of making the first move (先手). In anticipation of the inevitable rolling back of globalisation, Xi apparently wants to start making moves to shape the decoupling on China’s terms as much as possible.  

Other key dimensions of the new development paradigm include strengthening the position of state-owned enterprises and the ‘real economy,’ especially manufacturing and agriculture. China subsequently started cracking down on powerful private enterprises in the internet and platform economy sector, as well as over-leveraged property companies and speculative activities in properties in late 2020 and throughout 2021. Xi said in December 2021 that private capital was to shrink or grow in according to traffic light signals given by the CCP. In a study session of the CCP’s Politburo in April 2022, he reiterated the need to strengthen the supervision against monopolistic and anti-competition behaviours and work against the disorderly expansion of private capital.   

China has cracked down on after-school private tutoring. This is partly due to the desire to make the playing field even for children from disadvantaged families to get to common prosperity, which is a tenet of the new development paradigm. It also aims to boost the affordability of raising children. Chinese parents living in metropolitan areas on average spent 12 percent of their income on private tutoring for their children.  

The development of agriculture and rural areas and the promotion of the welfare of farmers are key dimensions of the new development paradigm. In Xi’s view, these will be instrumental to achieving food security, boosting domestic consumption and promoting common prosperity. The focus of urbanisation in the light of the new development paradigm will extend to county seats in the rural areas.   

Travelling on rough terrain  

The secular bull market in energy, industrial metals and grains is worsening China’s terms of trade. China imports 73 percent of its crude oil consumption, 41 percent of natural gas, 8 percent of coal, 20 percent of grains and many more industrial metals, while exporting mainly manufactured consumer goods. The potential further deterioration of its terms of trade is set to put negative pressures on China’s trade balance, GDP growth and companies’ operating margins.  

Another risk lingering over the Chinese economy and business as well as investor confidence is China’s zero-Covid policy. The number of new locally transmitted cases has gone down and Shanghai has reopened from a two-month lockdown. As of this writing, there are six cities under partial or district-based lockdown, which account for only about 5 percent and 9 percent of China’s population and GDP, respectively. This is a substantial improvement on the 44 cities in lockdown, translating to 25 percent of population and 38 percent of GDP back in mid-April. However, as long as the Chinese authorities are unlikely to abandon the zero-Covid policy before the CCP’s 20th annual national congress (the Party Congress) this late October or early November, or even before the Chinese government’s Two Session meetings in March 2023, the terrain on which the train of economy is travelling on may remain bumpy.  

Focus areas for stimulus to take the train running beyond zero-Covid speed limits 

With the all-important Party Congress approaching in less than six months, maintaining stability is the top priority for Xi and the Chinese authorities. In this Party Congress, Xi will seek his third term for the top office of the CCP, which is unprecedented. The Covid outbreaks over the past few months and the resulting lockdowns and sharp slowdown of the economy have indeed come at an inconvenient time. Taking the success in 2020 in containing Covid to the level of demonstrating the superiority of Chinese public governance, the threshold at which China could abandon its zero-Covid policy is high.  

Nonetheless, this does not necessarily mean that China will pull out all the stops to boost economic growth. Maintaining stability is in fact a coded phrase for retaining the legitimacy of the CCP’s one-party perennial rule over China. Common prosperity and fighting against corruption, poverty and pollution, among other things, are elements of maintaining stability in Xi’s taxonomy. The new development paradigm that was put in place in 2020 remains front and centre when it comes to Xi’s grand vision and thus in policy formulation.  

Stimulus measures have been rolled out and will continue to come in monetary policies, fiscal policies, relaxation of crackdown on the property sector and better visibility of regulations over the internet sector, but their magnitudes and paces will be measured. The Chinese authorities are mindful not to trigger another round of excessive leverage and speculative bubbles with large-scale monetary easing or reflating of the property sector. Reconfiguration of the balance between state capital and private capital is a central tenet of the ideology of the CCP under General Sectary Xi. The Chinese authorities will probably bring about more visibility and guidelines and remove some uncertainties hanging over regulations on the internet and ecommerce giants. However, rolling back regulations in a meaningful sense will be quite unlikely.  

The path of least resistance for China to take in order to stabilise its economy and keep unemployment in check is infrastructure spending. In April, Xi chaired a meeting of the Central Committee for Financial and Economic Affairs and called for increasing infrastructure construction, especially for transportation, energy, water conservancy, 5G, cloud computing and data centres, ultra-high voltage, artificial intelligence and industrial internet of things. 

Potential outperformance in Q3 but still in a bear market 

Policy divergence, light position and undemanding valuation may mean potentials for outperformance for Chinese equities in Q3 versus other major markets. There may be tradable rallies for traders to benefit from in the coming months. However, China is still in the process of transitioning to a new development paradigm, being hit by deteriorating terms of trade,  increasingly tight global financial conditions and a slower global economy, and facing uncertain development in pandemic control. Chinese equities may still be in a bear market and long-term investors should be patient in accumulating positions.  

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged foreign exchange trading); Type 4 Regulated Activity (Advising on securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.