More pessimistic forecasts for China’s long-awaited Third Plenum, which begins on Monday, suggest that the financial sector will remain constrained despite slowing economic growth. Meanwhile, more support for tech and manufacturing is widely expected. “For investors, it’s not necessarily bad news because everyone knows exactly where the money is going,” Dan Wang, chief economist at Hang Seng Bank in China, told me last week. He expects growth to slow in the near term, though, as Beijing tackles its longer-term priorities. “Industry is a big driver.”[ials]”Finance must return to its original form, prevent the transition from the real to the virtual world, and firmly place its contribution to the real economy as its starting point and final goal,” Han Wenxiu, executive deputy director of the Central Committee’s Financial and Economic Affairs Office, wrote in a widely read article last month, as translated by CNBC in Chinese. The official English summary listed four measures, the third of which called for the development of the “real economy” and “preventing the transition from the real economy to the financial economy.” The last “Third Plenum” was held in 2018. It is a meeting of the Communist Party of China’s Central Committee, whose members are elected every five years and hold about seven plenary sessions per term. The Third Plenum typically focuses on the economy. This year’s meeting is scheduled to end on Thursday. It was originally scheduled to be held last fall, but was postponed without explanation. “We expect the upcoming Third Plenum to focus on several areas that are crucial to China’s long-term economic path,” economists at Bank of America said in a July 8 report. “This includes promoting technological self-sufficiency, addressing demographic headwinds, and improving social welfare systems for jobs, incomes, education, healthcare, housing, childcare/elderly care, etc.” When discussing China’s global technological advantages, state media often highlights three export areas: new energy vehicles, lithium batteries, and solar power. Goldman Sachs published a lengthy report on China solar power on July 11, predicting that the industry is nearing a bottom. “Furthermore, we are beginning to see encouraging signs of new capacity and policy stances to curb predatory pricing, which we believe should bode well for accelerating industry consolidation into a leader with strong competitive advantages.” [balance sheet]”The next 12 months are the most interesting time to focus on the solar sector and look for long-term winners,” said Jacqueline Du and her team of analysts. One of the Chinese solar stocks with a newly launched buy recommendation from Goldman Sachs analysts is U.S.-listed Daqo New Energy, which makes polysilicon for solar power companies. Daqo will have 14% of global market share in 2023, no debt and has the strongest balance sheet of any of Goldman’s China solar coverage, the analysts said. “With this robust balance sheet, we believe Daqo has a strong defensive wall to weather the current industry downturn and become a consolidator over time.” The solar power company’s U.S.-listed shares closed at $16.89 on Friday, up about 30% against Goldman’s target price of $21.80. Another team of Goldman analysts, led by Si Fu, released a report on July 8 looking at opportunities in the solar power sector. The firm selected Chinese small-cap stocks based on their R&D intensity, overseas operations and alignment with Beijing’s policy direction. In a screen of 30 stocks, only two companies met all three criteria: auto parts maker IKD and Autowell, a maker of equipment for solar, lithium battery and semiconductor factories. Both are listed in Shanghai. “China is investing a lot in supply chains, manufacturing and high technology, which leads to productivity and further increases production capacity. That’s China’s unique strength,” Wang said. “China can’t become a modern society with … high income levels if it relies on infrastructure and housing.” “So the only solution is to actually increase productivity. It has a high chance of success, but there are a lot of uncertainties in the process, including financial risks,” Wang said. “We will try to address that in this meeting.”
