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China defence: Taiwan tensions lift arms makers as economy slows

History shows that heavy spending on armaments may reduce rather than increase stability. Still, the two goals align nicely for delegates at China’s annual National People’s Congress. Within Chinese business, this will create winners among defence companies and losers across many other sectors.

Chinese premier Li Keqiang mentioned the word “stability” 33 times in his government report summarising China’s key policies. Political conformity aside, that points to slowing growth and steadier prices and employment. Among top keywords, “reform” and “opening up” had the fewest mentions.

Meanwhile, China will increase military spending by more than 7 per cent this year, the biggest jump in recent years, as it warned of increasing threats. 

Taiwan is appropriately nervous. On Monday, Taiwanese officials told compatriots to be alert for a “sudden entry” by the Chinese military. China claims self-governed Taiwan as its own, and has stepped up its military activities around the island of late.

Beneficiaries of rising tensions should include warplane manufacturers Hefei Jianghang Aircraft and AviChina Industry & Technology. China State Shipbuilding Corp is also well-positioned.

Shares of all three companies are up more than 15 per cent this year. Hong-Kong listed AviChina trades at 11 times forward earnings, at a discount of a third to regional peers. Smaller defence groups such as Anhui Great Wall Military have gained more than 30 per cent.

Chinese defence companies tend to be more diversified than western peers. Their core businesses may include crop-seeding planes or nitrogen-based refrigeration systems. Depending how you look at it, that either muddies the investment proposition or provides a hedge for the years when defence spending falls.

Investors have little to worry about in relation to budget cuts, though some will have ethical qualms about Chinese defence stocks. The broader takeaway from Chinese buzzword Bingo is that the country is entering into a period of relative stagnation.

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