Will China Third Plenum Help iShares MSCI China ETF Thrive?

If you have been following the news on the China economic development and recovery, we have seen the Chinese ADRs in a rut.

These stocks have been enjoying the benefit of the recovery staged in the first five month of 2024, but now they have started to lose strength of upside as investors are looking at China authorities to do more to help to start up the economy, heal the property market and also bring confidence back at the two upcoming meetings.

If we have been following the China ETF, we would be familiar with iShare MSCI China ETF which has been up more than 5% currently while it clocked more than 16% year to date before 17 May due to low valuations.

But since then, little action from the Chinese government has cut about $4.40 from its share price (9%) in the 40 days since. Investors are hoping that the July meeting of the Communist Party’s Politburo will deliver important economic decisions and policies to kickstart the Chinese economy.

At the price of around $42.80, this looks like a potential buy now because the meeting of the Third Plenum could lead to tangible actions taken, that should help to move MCHI back above $45.

Something that is worrying is selling strength has still been seen on MCHI, and investors are not feeling positive about the meeting, on what the action could help to push the economy.

But I would think for the long term and also the view of a sustainable economic recovery, I believe we should be seeing traders and investors coming back soon.

Using the supertrend, similar observation, we are seeing bearish trend and no reversal sign in sight, what we really need is a clear direction from the meeting.

There are several factors which could help to push up the chinese economy, and in the next section, I would share those that I think make significant impact.

A more consumption-centred, skill-intensive and services-driven growth model that is consistent with internal economic rebalancing and aggregate demand management would be welcome, to do that China’s fixed asset and investment-heavy growth model must yield at a faster pace.

If we looked at the other two economies like Japan and South Korea, we will notice that even though their service sectors share of employment reached 70 per cent, low productivity growth constrained aggregate wages, shrank labour’s share of national income, exacerbated inequality and stymied investment-consumption rebalancing. This seems to show up in the chinese economy, hence, gaps in aggregate demand were typically filled by credit or asset price bubbles, a by-product of the financial liberalisations launched at the time.

What China can do to avoid this is to lower barriers to entry in its service industries and simultaneously guard against overregulation. It must progressively lift ‘hukou’ restrictions (the point system designed to shape migration in China) to make public services more equitable.

Building of an unified and portable social security net more in line with advanced economy coverage standards, in 2024 outlays on pensions, health and education as a share of GDP are ten per cent lower in China. This could be done while gradually raising the retirement age to add millions of workers to the labour force. Reform of hukou and pensions will chip away at Chinese households’ propensity for excess savings and facilitate internal and external rebalancing.

One more worrying sector is the housing sector. This sector’s footprint on growth and consumption need to be shrink, particularly in the construction and the provision of property-related services. Policy support must be limited to ensure the sector does not serve as a drag on growth.

If you so have some forms of investment in China, I personally would think that we should pay attention to the China Third Plenum, as there are certain things that could shape how China economy recovery would look like.

In order to take opportunities before the event, MCHI is one good ETF to go in at its current price, and not forgetting some of the consumer focused Chinese ADRs like PDD, Baidu, Alibaba.

Appreciate if you could share your thoughts in the comment section whether you think China third plenum would help to lift chinese ADRs and MCHI?

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.