China New Vision: Master plan for the future
Structural change in China is still progressing. As part of the 14th five-year plan, the central government has set itself ambitious goals for the period until 2025. Certain sectors and companies could benefit from the targeted reform efforts. With the tracker certificate on the Vontobel China New Vision Index, investors can participate in the price performance of these companies. Furthermore, Vontobel presents a simple solution that allows investors to participate in the broad universe of Chinese A-Shares.
Structural change in China is still progressing. As part of the 14th five-year plan, the central government has set itself ambitious goals for the period until 2025. Certain sectors and companies could benefit from the targeted reform efforts. With the tracker certificate on the Vontobel China New Vision Index, investors can participate in the price performance of these companies. Furthermore, Vontobel presents a simple solution that allows investors to participate in the broad universe of Chinese A-Shares.
Tencent, Alibaba, NIO, BYD, Huawei: These are all names of Chinese brands that have become big in recent years. Not limited to China - these giants can also hold their own globally. Innovation and technological progress have been the secret weapons behind the rise of Chinese companies on the global stage. For 3 years in a row, Huawei has been the company with the highest number of patent applications filed with the World Intellectual Property Organization. The country itself has put an end to the more than 40-year long streak of the United States as the top filer country of international patents. Thus, it is not a coincidence that innovation continues to be a key element of the fourteenth five-year plan. Beijing approved this plan a few weeks ago. The plan leaves no doubt: the government wants to further strengthen China's position in the global economy and is investing large sums of money to achieve this goal.
The plan provides a clear indication of the direction in which the country is to develop over the next few years. Unlike in the past, the recently passed five-year plan does not record any longer binding targets, but rather guidelines. For example, the latest plan does not include an explicit target for the development of economic output over the next five years - but rather takes a long-term perspective on GDP and productivity growth.
Increase domestic consumption and quality of life
Domestic consumption is becoming the central pillar of the Chinese economy. As part of the 14th five-year plan, the government aims to reduce the unemployment rate and raise urbanization to 65% from 60.6% in 2020. China’s leadership expects to further increase income levels and hence encourage consumption. This would also reduce the dependence of the Chinese economy growth on gross exports and gain greater independence from other countries. This desire was spurred by the trade conflict with the USA, which intensified under former President Trump and also negatively impacted Chinese companies. As a result, the country's domestic products are to replace imported ones, prosperity is to increase and the country's consumers are to benefit more.
For this reason, the new plan includes goals to improve overall quality of life, such as a pension system to cover 95% of the population by 2025 (vs 91% in 2020), an increase in the number of years of compulsory schooling, health care improvements and the introduction more and more daycare centers to be introduced.
In addition to the goal to increase the quality of life of the Chinese population, the aim is also to fulfil their basic needs. Therefore, another goal of the Chinese authorities is to increase agricultural production as well as energy production and to ensure the supply of goods for the population without having to rely on imports.
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Innovation and technological leadership
Technological progress goes hand in hand with boosting domestic consumption. Leading technologies are to be developed and components manufactured in the country itself. Research and development should therefore primarily take place domestically. Therefore, China wants to continue to drive innovation and technological progress in the coming years in order to reduce its dependence on foreign high-tech products. Big data, cloud computing, 5G, artificial intelligence and electric cars are just a few of the buzzwords that will come into play as part of these subsidy measures. The main objective is to achieve an annual growth rate for research and development expenditures in these areas of at least 7%.
The enormous growth that the Chinese tech giants have already experienced in recent years has certainly been partly due to the protection from American competition. Companies like Google or Facebook have failed because of the "Great Firewall", with which the Chinese government has imposed barriers on every foreign company. This is likely to remain the case in the future and further boost the growth of large Chinese companies. On the other hand, in many cases this will also make it more difficult for Chinese companies to take advantage of international growth opportunities, as they will in turn encounter similar barriers or obstacles to investing in many countries, or will be viewed with suspicion.
However, Chinese high tech products are not only popular in the home market but also steadily increase their market share internationally, especially among end consumers. The best examples of this are the telecommunications companies Huawei and Xiaomi, whose cell phones are also very popular in many other countries. The aim is for this to continue in the coming years and for Chinese products to be sold all over the world. Not only cell phones - but also electric cars are expected to follow this route. However, many countries (e.g. the USA and also the EU) continue to find it difficult to place international orders with Chinese companies, which could slow down international growth in some segments.
Green energies
Back in September of last year during the UN General Assembly, Xi Jinping announced that China intends to become climate-neutral by 2060. The first steps toward achieving this goal are subsequently also embedded in the fourteenth five-year plan. By 2025, energy consumption to generate one unit of economic output shall be reduced by 13.5% compared to the end of 2020. The same applies in terms of CO₂ emissions, which shall be reduced by 18% in the production of one unit of gross domestic product. The consumption of fossil energy sources in the energy mix shall also be significantly reduced. The share of non-fossil energy sources is currently around 15% - it is intended to contribute one fifth by 2025 and increase to 30% by 2030. In addition, better air quality in cities and good water quality shall be achieved. Furthermore, area covered by forests shall be increased. Significant investments in new infrastructure and research and development are needed to achieve the climate targets.
Strong will to initiate reforms opens up opportunities – also for investors?
Interesting investment themes can be derived from knowledge and closer analysis of the many governmental decisions about economic policy. After all, if the measures prove successful, Chinese companies could benefit from the support. This could have a positive impact on the share prices of these companies.
The Multi Asset Team from Vontobel Asset Management has developed an index that tracks companies that could particularly benefit from the initiatives under the fourteenth five-year plan. For this purpose, Vontobel has developed a model to identify these very companies. The selection of the index members follows the following scheme in every case:
From the universe of around 800 Chinese medium-sized and large companies, those companies that do not comply with Vontobel's investment philosophy and those with a low ESG rating are excluded. The exclusion of these companies that have a low ESG rating is in line with China's goal of becoming more sustainable. Thereafter, a breakdown is made into basic needs and innovations for the future.
Society's base: The focus here is on ensuring the basic needs of the population. The companies in this category need to provide good quality products and services for the most essential needs of everyday life. After the economic reform in 1992, the Party has always placed much emphasis on improving the overall quality of life and ensuring the supply of essential goods. Therefore, the focus in this category is on companies that have a relatively good products and service quality level compared to their competitors.
Society's vision: Here the focus lies on those sectors where more strategic planning takes place and cutting-edge research/technologies are applied, e.g. AI, Big Data technology, semiconductors, advanced materials, industrial machinery, etc. In this category, not only the quality of the companies compared to their peers is taken into account, but also the innovative strength of the company, e.g. how much they invest in research and development in relation to sales, plays an essential role for inclusion in the index.
Once all companies have been selected, the weighting of the industries, sectors and finally the individual companies, which are ultimately included in the index, is carried out. Comparing the weightings of the Vontobel China New Vision Index with its benchmark, the MSCI China Sector Weighting Index, the sectors that – according to Vontobel’s view – are likely to benefit from the plan have a higher weighting. Overall, the sector allocation is more balanced compared to the benchmark, which results in better diversification.
Using the tracker certificate on the Vontobel China New Vision Index, investors can easily participate in the price performance of Chinese A-Shares. The Chinese A-share market is one of the largest stock markets in the world; it provides access to significantly more Chinese companies than the Hong Kong market (H-shares). However, foreign investors have only been able to invest in A-shares for a few years, which is why the foreign equity share in A-shares is still relatively low and A-shares tend to be underrepresented in portfolios of non-Chinese investors.
With the tracker certificates on the Vontobel China New Vision Index, investors almost fully participate in potential price gains, but also in potential price losses of the shares included in the index. The index fee in the certificate is 1.25% p.a. Investors bear the issuer risk.
When investing, investors should be aware of the particular risks in Chinese stocks, which may be strongly affected by potential trade and political conflicts as well as government measures both within China and in their international activities.
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Risks
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