After a turbulent 2021, China has put economic growth back to the top of its agenda while opting for patience on long-term structural reforms.
At the just-concluded annual Central Economic Work Conference in Beijing from Dec 8 to 10, China’s top decision makers set a dovish policy tone to stimulate the country’s slowing growth in the new year.
Amid demand contraction, supply chain disruptions, power shortages, and weakening expectations, Beijing hinted at more liquidity injections, more fiscal spending, and modest rate cuts while staying cautious on the aggregate level of leverage in the economy.
Regulations for coal consumption as well as for the property and internet sectors are expected to be less severe in order to avoid further disruptions to the economy. Patience will be given to decarbonisation targets and long-term structural reforms, including “common prosperity”.
This week, AsianInvestor collected cues received by the market from China’s top economic meeting, and asset allocation strategies in the world’s second-largest economy in the new year.
The following responses have been edited for brevity and clarity.
Chang Hwan Sung, portfolio manager, solutions research, APAC
The recent Central Economic Work Conference (CEWC) in China showed a significant focus on economic stability and potential growth measures, as well as change of views on coal and climate-change related economic activities.
Even though risky assets in China had a volatile year in 2021, we believe policies that support growth will lead to more stable growth in coming years; we forecast north of 9% in total return in US dollar for China onshore equities in the long term. We also believe China onshore Renminbi fixed income will be a great diversifier for global investors in the long term especially given its higher yield levels in this low interest rate environment, lower correlation with other asset classes and stable foreign exchange thanks to China’s current account surplus. Our long-term return forecasts in Renminbi are between 3 and 4% for onshore fixed income, with credit returns slightly higher than those for policy bank bonds and treasuries.
We also recently looked at how policies to counter climate change could impact long-term returns in various equity markets based on two scenarios, namely meeting Net Zero 2050 initiative, and staying with delayed transition. We expect small negative impact on real growth for major economies such as the US and China for both scenarios. However, due to slightly higher inflation, nominal growth will be higher for China for both cases, assuming meeting Net Zero targets and staying in a slower path of delayed transition.
Michele Barlow, head of APAC investment strategy and research
State Street Global Advisors
China’s CEWC emphasized the importance of stabilizing growth, setting a more dovish policy tone, by pledging effective easing in fiscal, credit and property policies.
There was an emphasis on faster on-budget spending and “frontloaded” infrastructure investment on the fiscal side, but this could be somewhat limited as “local government implicit debt increases would be strictly forbidden”. On the monetary side, we anticipate a step-up in credit growth, with particular support for small and medium-sized enterprises (SMEs), technology and green industries. While the statement potentially leaves room for more city-level easing in the property space, there is unlikely to be a U-turn in existing property curbs.
So, while policy easing is expected to increase, it’s unlikely to be very aggressive. Policymakers are likely to utilize reserve requirement ratio (RRR) and other liquidity facilities to support growth but the potential for a rate cut will increase if growth continues to slow more than expected into the first quarter of 2022. We are forecasting gross domestic product (GDP) growth to slow from 7.9% this year to 5% next year.
From an investment standpoint, we favor Chinese bonds which provide diversification and provide an attractive yield pick-up to developed market bonds for similar ratings. We suggest investors maintain their exposure to Chinese equities as they will deliver over the medium-term, but recommend an active approach given the more uncertain macro and regulatory environment.
Marcella Chow, global market strategist
JP Morgan Asset Management
The recent CEWC was held in early December, the earliest one in the recent decade, reflecting the urgency to stabilize market expectations. In 2022, there may be more cuts to the RRR and short-term loan prime rate (LPR), to reduce the lending costs and support bank lending to SMEs. Meanwhile, tax breaks and fee cuts for businesses, as well as infrastructure investment, are proposed as the key fiscal tools to boosting domestic demand, which should benefit sectors such as industrials, materials and transport.
This shift to accommodative policies should help to stabilise economic growth momentum in the first half of 2022 and boost sentiment and support valuations in the stock market. That said, investors should bear in mind that the long-term reform objectives, such as common prosperity, deleveraging and decarbonization remain on the table and will continue to affect the investment landscape in China. Therefore, it is essential to be selective in the Chinese market and remain invested in themes with long-term potentials, such as technology self-sufficiency, renewable energy and consumption.
Meanwhile, technology self-sufficiency should benefit information and technology sectors such as hardware, semiconductors, and software. Consumer services, food and beverages and home appliances may benefit from the move to promote consumption recovery. With regards to renewable energy, solar inverter producers, wind farm operators and renewable operators etc may benefit.
Dong Chen, head of Asia macroeconomic research
Pictet Wealth Management
The steadier manner they are taking in “common prosperity” and climate commitment shows that the authorities are well aware of the disruptions caused by some policy changes in 2021 and intend to mitigate their impact in 2022. We believe there is less of a chance for new sector-wise harsh regulations in 2022, and the power shortages like in September are unlikely to repeat themselves in 2022.
According to the meeting statement, fiscal support should be frontloaded and focus on infrastructure investment, where the investment can be slightly ahead of the current demand as well.
In our view, the key areas of investment may include renewable energies (e.g. solar and wind power and smart grids), electric vehicle charging facilities, 5G networks and so on. A rebound in infrastructure investment, in particular green projects, could play an important role in mitigating downward pressure on growth.
Chris Kushlis, chief of China and emerging markets macro strategy
T. Rowe Price
For asset allocation, we see the fixed income market onshore as balanced with the curve likely steepening. The Renminbi should continue to see near-term appreciation pressure given the large external surpluses but should moderate later in the year as the Federal Reserve and other global central banks hike rates.
In the US dollar credit market we see pockets of opportunities given the large selloffs in the high-yield space but credit selection will remain key to realize value here.