Takeaways from the CCP Centenary Celebration

China celebrated the centenary of the formation of its Communist Party last week. Two key messages were emphasized during President Xi Jinping’s keynote speech that we expect can provide good long-term growth prospects for the country’s alternative energy, consumer, and technology sectors.

Firstly, President Xi attributed China’s successful attainment of a “moderately prosperous society” to a few key growth factors such as urbanization, productivity growth, as well as the efficiency of China’s socialist system with Chinese characteristics.

China’s GDP per capita grew from less than USD $1,000 in 2000 to USD $10,500 in 2020, representing a CAGR of over 26%, lifting hundreds of millions of Chinese out of poverty in two decades. Even though China is unlikely to catch up with the more developed economies on a per capita basis for a while, the country’s aggregate GDP is expected to surpass the US by 2028^1.

A key driver of China’s economic growth in recent years has been urbanization. The urbanization rate in China rose from 36.2% to 63.9% in the past twenty years². Urban residents were estimated to contribute to more than 90% of China’s nominal GDP in 2018³. Though, China’s most recent census shows a slowing urbanization and population growth rate. To combat these shifts in demographics, policymakers recently allowed families to have up to three children and expedited the household registration “Hukou” reform to allow workers to migrate more easily to cities.

Secondly, attention was drawn to the escalating risks of an increasingly unfriendly external environment – in light of the recent G7 and NATO summits that resulted in the US creating a multilateral front of allies against China on specific security issues. It’s no surprise that President Xi undertook a hawkish tone in his speech against perceived foreign adversaries. Beijing has recently beefed up its military spending and doubled down on its need for greater self-reliance and competitiveness in fundamental technologies.

For example, China continues to rely heavily on foreign semiconductors which accounts for 18% of its total imports in 2020⁴. While Taiwan chip makers are currently manufacturing 3-nanometre processors, China ‘s chip manufacturers only began producing 14-nanometre chips at the end of 2019⁵. One of the aims of China’s recent “Dual Circulation” strategy is to bolster its technology independence. Thus, policymakers have carved out USD $1.4 trillion to be invested into its domestic tech sector by 2025 and grow basic research and development spending by over 7% annually over the next five years⁶.   

Another hallmark of the Dual Circulation strategy is the aim to bolster domestic consumption, which can be strengthened by the country’s rapid digitization trends. By the end of 2020, 1.22 billion Chinese people subscribed to mobile services in China, equivalent to 83% of population⁷. The rise of e-commerce has the potential to also benefit consumers based in rural areas. While retail sales in urban areas from January to May grew by 9.8% from 2019 levels, rural retail sales declined by more than 2% in the same period⁸. With an increasing internet penetration rate, it’s likely that the growth of China’s e-commerce and other digital economy businesses can allow rural consumers to participate more actively in the consumer markets.

Investment Implications

The second major celebration is slated for 2049, the 100th anniversary of the founding of the People’s Republic of China. President Xi has already outlined a broad domestic vision for the next two decades: to build a "socialist country that is modern and strong”, with the focus on boosting domestic demand, technology innovation and environmental protection. We think that President’s Xi’s policy prescriptions and societal aspirations can act as significant long-term growth drivers for China’s alternative energy, consumer and technology industries. 

This article was authored with contributions from David Xu, Summer Analyst.

_{Investment risks}

_{The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.}

_{When investing in less developed countries, you should be prepared to accept significantly large fluctuations in value.}

_{Investment in certain securities listed in China can involve significant regulatory constraints that may affect liquidity and/or investment performance.}

_{^1 https://www.reuters.com/article/us-health-coronavirus-china-economy-idUSKBN29000C
^2 China National Bureau of Statistics
^3 https://www.wsj.com/articles/china-migration-rural-return-xi-economy-11605632518  
^4 https://www.bloomberg.com/news/articles/2021-02-02/china-stockpiles-chips-and-chip-making-machines-to-resist-u-s?sref=1H7PBH2o
^5 https://www.scmp.com/tech/innovation/article/3118183/tsmc-gears-mass-production-3-nanometre-chips-high-end-computers-and
^6 https://www.cnbc.com/2021/03/05/china-to-boost-research-and-development-spend-in-push-for-tech-breakthroughs.html
^7 https://www.gsma.com/mobileeconomy/wp-content/uploads/2021/02/GSMA_MobileEconomy2021_China_Eng-1.pdf
^8 National Bureau of Statistics}

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