China has turned to its biggest tax cut in history to dispel some of the intense gloom that has fallen over the business sector, which is worse than Guangzhou pollution on a bad day. The world's largest parliament, in the form of the National People's Congress (NPC), is meeting in Beijing. Its rubber-stamp procedures will end next week. But there are three points worth noting.
First, China has pledged to reduce taxes and fees by 2 trillion yuan (US$298 billion), an aggressive step-up from last year. It is lowering VAT in particular to the benefit of manufacturers and companies in construction as well as logistics. Conclusion: It'll goose industry where necessary.
Second, the NPC by its conclusion on March 15 also will debate and surely pass a rewrite of its rules on foreign investment. It's likely to make sweeping statements without a lot of detail as to how the changes would happen. But it's a nod to Washington. At the back of all of this, little mentioned in the long speeches is the specter of the trade war with the United States. Both sides would like to see that end, and soon.
Third, China has lowered its growth target for the year to anywhere between 6.0% and 6.5%. That's down from the actual rate of 6.6% achieved for 2018, already the slowest pace since 1990, which basically kicks off China's modern economic era. It's also lower than the rate of "around" 6.5% "forecast" each of the last two years.
I say "forecast" because China inevitably hits its predictions. That's easy when you can manipulate the data as you see fit. Many regional officials have their performance assessed on economic advances, encouraging overstatement of the rate of growth.
The reports I'm reading suggest Chinese growth this year will come in at the low end of the new range. Oxford Economics and AXA Investment Managers both forecast growth of 6.1%, with AXA calling 6.0% the "binding bottom-line." Of course, it is. The Party has spoken on that.
With its announcements so far on spending, the central government is striking a "fine balance," in the eyes of Aiden Yao, AXA senior emerging Asia economist. It is working to achieve both "near-growth stability and long-term economic sustainability." Beijing would also like to see its bloated state-owned sector reform, but not so fast it hurts that growth.
The tax cuts will help achieve that goal, and the central government has also made it easier for local governments to spend on infrastructure projects. For now, though, Beijing is holding back on easing credit conditions and opening the "liquidity flood gate" with significant stimulus in the form of government spending.
If the situation really gets desperate, Beijing can always turn to the real estate sector. Its tight rules on property purchases and its tough restrictions on the ability of developers and homebuyers alike to get financing are keeping China's favorite industrial sector in check. Should Beijing really need to find growth in a hurry, it could lift the restrictions and pump out mortgages in a way that would seriously boost the morale of the middle class.
The fabled middle-class "Mr. and Mrs. Chan" would include the retail investors who still drive China's domestic stock markets.
U.S. investors should still consider an A-share ETF as a way to tap into Chinese growth, even though it is at its lowest ebb in three decades. The play is given a strong structural underpinning by MSCI's decision to ramp up the inclusion of A-shares in its much-followed emerging markets index over the course of this year.
There was US$1.8 trillion in assets tracking that index as of June, the last time MSCI reported the total. That money does not treat Chinese stocks evenly, limiting their inclusion in the index based on their lack of availability to investors. So, ramping up the "inclusion factor" from 5% of their actual market capitalization to 20% of their actual value by increments in May, August and November brings in big money.
The CSI 300 index of the biggest stocks listed in Shanghai and Shenzhen is up 27.8% year to date, a rally that coincides exactly with the change in calendar year. That suggests there is machine buying taking place as institutions try to keep up with the inclusion necessitated by any ETFs or funds mapping or tracking the MSCI Emerging Market index.
The largest A-share-specific ETF is the Xtrackers Harvest CSI 300 China A-Shares Fund (ASHR) , with US$1.7 billion in assets. It's up 30.7% in 2019. Similarly, the VanEck Vectors ChinaAMC CSI 300 ETF (PEK) has advanced 31.5%, although it's way smaller at US$70.8 million.
The CSI 300 selects the biggest 300 companies, by market cap, from Shanghai and Shenzhen. It's market-weighted, so it's a straight rundown of the biggest mainland-listed companies.
For an MSCI-specific index, look at the KraneShares Bosera MSCI China A Share ETF (KBA) , though it has quirks such as a 5.0% weighting to white-spirits maker Kweichow Moutai and 4.0% weighting to Ping An Insurance, because that index is adjusted by the free float of shares.
Ping An, at US$196.7 billion in assets, is one-third larger in the market's eyes than the booze maker, at US$143.9 billion. So the ETFs tracking the CSI 300 give you a better picture of the largest Chinese companies, bearing in mind that companies trading overseas such as U.S.-listed Alibaba Group (BABA) and Hong Kong-listed Tencent Holdings TCEHY, which are among the 10 biggest companies in the world, are excluded from that list.
Those international listings are China's most-stable, best-run companies. But they're already included in global indexes as well, meaning there's little change in their structural holdings. You'll need to go to Shanghai and Shenzhen, and stocks that are dangerous in terms of governance and volatility to own individually, to find that.