Comment on events
In 2022, China’s military budget was 1.45 trillion yuan, with a year-on-year growth rate of 7.1%, and the target growth rate of GDP in the same period was 5.5%. On March 5, according to the draft government budget report submitted by China’s Ministry of finance at the fifth session of the 13th National People’s Congress, China’s military budget in 2022 was 1.45 trillion yuan, a year-on-year increase of + 7.1%, an increase of 0.3pct over last year, and the growth rate of China’s military expenditure exceeded 7% again after two years. The state’s increased military spending reflects its determination to “strengthen the modernization of national defense and the army, achieve the unity of a rich country and a strong army, and ensure that the Centennial goal of building the army will be achieved by 2027”. From 2016 to 2022, the growth rate of China’s national defense budget was 7.6% / 7.0% / 8.1% / 7.5% / 6.6% / 6.8% / 7.1% respectively, and the growth rate of GDP in the same period was 6.9% / 7.0% / 6.8% / 6.0% / 2.2% / 8.1% / 5.5% respectively (expected target). Overall, the growth rate of China’s defense budget is higher than that of GDP (GDP growth in 2021 is higher than that of defense budget or related to the low base effect of GDP).
The year-on-year increase in the military budget in 2022 may not be related to the situation in Russia and Ukraine. According to Fu Qianshao, a military expert, China’s military expenditure is formulated in full accordance with the needs of national defense construction and national security. On the one hand, it needs to take into account peace and security in the Asia Pacific region, on the other hand, it needs to consider the needs of national security and development. According to Wu Qian, spokesman of the delegation of the people’s Liberation Army and the armed police force, China’s increase in defense and military spending is mainly due to 1) ensuring the start and implementation of major projects and key projects in accordance with the layout of the 14th five year plan for military construction; 2) Accelerate the upgrading of weapons and equipment and promote the modernization of weapons and equipment; 3) Accelerate the transformation of military training, build a new military personnel training system, and improve and improve the training support conditions; 4) In line with the national economic and social development level, we will improve the living and welfare benefits of officers and soldiers and serve the construction of the grass-roots level of the army. From the perspective of time dimension, the formulation of China’s military budget precedes the time of war, and the two are not directly related.
Many countries around the world have increased their military budgets to cope with the volatile geopolitical situation. From the perspective of the defense budget of the world’s major military powers, under the European defense plan and the strategic deployment of India and the Pacific, the United States continued to increase its defense budget. In fiscal year 2022, the defense budget of the United States was $770 billion, a year-on-year increase of + 5.0%, a record high; In the context of geopolitical tensions, India’s defense budget in fiscal year 2022 increased to US $54.2 billion, a year-on-year increase of + 9.3%, of which more than a quarter of the funds will be used to promote the self-reliance of local enterprises and promote the Indian army to gradually get rid of import dependence in the field of equipment procurement; France’s defense budget in fiscal year 2022 was 40.9 billion euros, a year-on-year increase of + 4.3%; The outbreak of the Russian Ukrainian war led Germany to adjust its defense policy. At the end of February, the German Chancellor announced a substantial increase in defense spending, including the approval of 100 billion euros of special funds, and increased Germany’s annual defense spending to more than 2% of GDP in the future; In the context of the increasingly tense situation in East Asia, Japan continues to increase its defense expenditure. In fiscal year 2022, Japan’s military expenditure will reach 5.4 trillion yen (about 47 billion US dollars), a year-on-year increase of + 2.6%, setting a new record in the scale of capital expenditure, which is the eighth consecutive year of Japan’s military expenditure growth.
The proportion of China’s military budget in GDP is still low, and there is much room for improvement. In terms of the proportion of military budget to GDP, according to the target GDP growth rate of 5.5% proposed in the work report of the Chinese government, China’s defense budget will account for about 1.2% of GDP in 2022. According to the GDP growth rate predicted by the IMF, the proportion of the national defense budget of the United States / Russia / India / Britain / France / Germany (planned) / Japan in GDP in 2022 will be 3.2% / 3.1% / 1.7% / 2.0% / 1.6% / 2.0% / 1.0% respectively. China’s national defense strength does not match its economic strength. There is still a large gap in the proportion of military budget to GDP compared with the world’s military powers, and there is much room for improvement in the future.
Investment advice
Focus on high-profile sub industries, focusing on aviation, aerospace, new materials and information sectors. 1) Aviation: Aviation: it benefits from the total amount and the generation gap. It benefits from making up the gaps and reinforcing the gaps. The country is now in the critical period of upgrading military aircraft. The demand for new fighter aircraft is increasing, and it is expected that advanced fighter aircraft will continue to be mass produced in the next few years. It is expected that advanced fighter aircraft will continue to be mass production in the next few years. Relevant targets include Avic Xi’An Aircraft Industry Group Company Ltd(000768) \\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\; 2) Aerospace: precision guided weapons benefit from the mounting of incremental weapon platform + replacement and upgrading of new products + increased consumption of live ammunition drills + Chinese products are well-known in the international market, including Beijing Relpow Technology Co.Ltd(300593) , Chengdu M&S Electronics Technology Co.Ltd(688311) ; 3) New materials: thanks to the increase in the volume of aerospace and the increase in the proportion of carrier consumption, and the superposition of military civilian integration and localization substitution factors, the new materials sector is expected to maintain a high outlook, including Western Superconducting Technologies Co.Ltd(688122) , Baoji Titanium Industry Co.Ltd(600456) , Gaona Aero Material Co.Ltd(300034) , Jiangsu Toland Alloy Co.Ltd(300855) , Sinofibers Technology Co.Ltd(300777) , Weihai Guangwei Composites Co.Ltd(300699) ; 4) Informatization: benefiting from the deepening trend of military informatization and the large-scale growth of many downstream fields, with the acceleration of military modernization and the acceleration of superposition and localization substitution, the informatization sector is expected to usher in a period of rapid development, including Avic Jonhon Optronic Technology Co.Ltd(002179) , Unigroup Guoxin Microelectronics Co.Ltd(002049) , Guizhou Space Appliance Co.Ltd(002025) , China Zhenhua (Group) Science & Technology Co.Ltd(000733) , Beijing Yuanliu Hongyuan Electronic Technology Co.Ltd(603267) , Zhuzhou Hongda Electronics Corp.Ltd(300726) ; 5) Reform of state-owned enterprises: benefit from the expectation of asset injection / equity incentive expectation / equity incentive has been done, and the relevant targets include Avic Xi’An Aircraft Industry Group Company Ltd(000768) , Sun Create Electronics Co.Ltd(600990) etc; According to the military industry group, the relevant targets include listed companies under the Aerospace Department, the electronics department and the weapons department.
Risk tips
Tip 1: the implementation of the policy is less than expected.
Tip 2: the construction and payment of weapons and equipment do not meet expectations.
