Investors are rooting for industrial companies, but China’s 14th five-year plan could bring a lot more stress to a post-COVID-19 global economy attempting a recovery. The world should watch carefully as Beijing gets ready to unveil a blueprint focused on high-tech industry.
Between trillions of dollars of fiscal stimulus, easy money and China’s broadly accelerating credit cycle, global industrial stocks have found a tailwind. Data out this week showed external machinery orders in Japan — a leading indicator of capital goods exports — rose almost 50% from August, the second straight increase that’s brought them back to pre-virus levels. All good news.
However, investors should exercise caution. An academic paper published in April by Xiao Cen and Wei Jiang of Columbia University’s business school and Vyacheslav Fos of Boston College found that Beijing’s industrial policies packaged together as five-year plans result in a shock to growth in targeted industries — inside and outside of China. “These plans were not preceded by low production or employment in the same industries in the U.S., but were followed by shrinkage of establishments and employment one to two years down the road,” the paper said. Based on valuations, returns, hiring decisions, no one — not even the stock market — had expected deterioration until the plans were unveiled.
In the past, this phenomenon struck things like furniture and toy companies, or so-called sunset industries. Washington could live with that. But now, China is increasingly focusing on sectors that both countries want to lead in, such as 5G and all things green. It’s a warning shot for whoever occupies the White House after the coming election.