Read on China New Consumer Policies

China consumer has recently received a series of policy stimuli. In July, 3rd Plenum mentioned consumption tax reform, while boosting consumption receives higher priority in Politburo meeting¹. Additionally, NDRC and MoF allocated Rmb300bn long-term special bonds to support consumer trade-in and equipment upgrade². In August, State Council rolled out 20 key steps on enhancing domestic consumption³. In this article, we will outline recent key policies and analyze their impact.

1.Consumption Tax Reform: Possible Impact on Baijiu Players

Details

Document from Third Plenum mentioned that: 1) the collection of consumption tax should be shifted towards the consumption end instead of current collection at the production firm level. 2) Local governments will get a growing share of the consumption tax revenue, comparing with the current practice that 100% of consumption tax goes to the central government.

Implications

Overall, this adjustment could encourage local governments to focus on consumer spending rather than prioritizing boosting production.

Sector-wise, we believe this tax reform could favour leading high-end Baijiu players. These top-tier players are likely to sustain stable ex-factory price and transfer incremental tax burden to maintain profit margins thanks to 1) low consumer price sensitivity, 2) strong bargaining power along the supply chain, 3) local governments’ heavy reliance on their tax revenue. Meanwhile the shift may lead to increased market consolidation, as low-end Baijiu companies may be compelled to lower ex-factory price to maintain retail price stability due to higher consumer price sensitivity and weaker bargaining power, leading to profitability erosion. More details are expected to come out likely later in 2H or next year.

Key Beneficiaries

High-end Baijiu players like Kweichow Moutai and Wuliangye are expected to benefit.

China Consumer Brand ETF (2806 HKD) provides investors with the opportunity to capitalize on the policy trend, with Wuliangye and Kweichow Moutai being the primary and secondary largest holdings within the fund.

2.Rmb300bn Treasury Bonds to Support Equipment Upgrade & Consumer Trade-in

Details

On 25 July, the NDRC specified arrangements for Rmb300bn in ultra-long-term special treasury bonds to support equipment replacement and trade-ins for consumer goods like autos and home appliances. Details are shown in table below.

Implications

Compared to previous policies, this measure is expected to deliver more significant impact as: 1) The scale and scope of this initiative have exceeded market expectations, in contrast to the previous plan which lacked a specified fund amount, resulting in restrained market anticipations. 2) Increased central government support. For previous subsidy program of passenger vehicles, the allocation to finance the subsidies between central/local governments was 6:4⁴, while it increased to 9:1 this time⁵. This is also higher than nationwide home appliance “To the Countryside” program from 2008 to 2012, which primarily relied on 80% funding from the central government’s fiscal support⁶. This heightened contribution from the central government is poised to ignite greater enthusiasm among local authorities.

1. Home Appliance: Expect Meaningful Sales Up sideThe subsidies are easily accessible as there is no requirement to replace existing appliances, and they are also substantial, amounting to 15-20% of the product’s retail price. Assuming a subsidy allocation of Rmb15bn for home appliances, this initiative has the potential to stimulate a significant retail demand of around Rmb100bn.Key Beneficiaries

   We expect that home appliance companies with a significant share of domestic sales, particularly those specializing in white goods, will be the primary beneficiaries of the trade-in policy. Key name includes Midea, Hisense, and Haier Smart Home.China Consumer Brand ETF (2806 HKD) provides investors with the opportunity to benefit from this stimulus, with home appliance (incl. Midea, Hisense, and Haier Smart Home) ranking as the second largest subsector within the fund.

2. Autos: The Subsidy Amount for Passenger Vehicles DoublingThe upgraded auto trade-in stimulus reaffirms the government’s commitment to bolstering auto demand. We expect that the doubling of subsidies will drive an increase in sales volume this year. According to CPCA data, the total number of passenger vehicles currently meeting the scrappage criteria amounted to 16 million units in 2023⁷. UBS projected that the recent stimulus could potentially generate an additional demand of 2 million units, given that the subsidies of Rmb15-20k represent a significant 10-20% of the price of a mass-market vehicle.⁸Key Beneficiaries

   We believe this will favour mass-market car makers including BYD and Great Wall Motor as well as auto parts suppliers like Fuyao Glass and Toupu.China Electric Vehicle and Battery ETF (2845 HKD): BYD and Fuyao Glass stand as the second and fifth largest holdings, while the fund also has position in Tuopu.China Consumer Brand ETF (2806 HKD) holds positions in Fuyao Glass and Great Wall Motor.

3.Politburo Meeting: Boosting Consumption Receives Higher Priority

Details

Comparing the 2H policy guidance from July Politburo meeting with those of the April politburo meeting, there is a clear emphasis on boosting consumption. The recent statement underscored the importance of stimulating consumption to bolster domestic demand, shifting the focus of economic policy towards enhancing social welfare and consumption. It outlined strategies to raise household incomes through various means, improve the consumption potential and inclination of low- and middle-income segments of the population.

Implications

The meeting specifically highlighted the significance of advancing and enhancing service consumption, such as cultural tourism, elderly care, childcare, and housekeeping. This led to expectations that following the recent introduction of trade-in subsidies for consumer goods, the government might introduce additional initiatives to bolster service consumption.

Key Beneficiaries

China Consumer Brand ETF (2806 HKD) could help investors capture investment opportunities in China consumer sector.