- Macro Strategist
Singapore, Individual
Change
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed.
The economy: A low bar for growth
Consensus expectations for China’s economic growth have not been this pessimistic in a generation, perhaps longer. With the bar set so low, it won’t take much for the Chinese economy to deliver an upside surprise in 2023.
China has experienced a maximum stress-test. For well over a year, a triple whammy of housing-related distress, zero-COVID lockdowns, and a generalized sense of policy angst have stifled consumer and business confidence (Figure 1). Amid massive pressure on multiple fronts, nothing has gone “bang.” One can never rule out a crisis event, but I believe China’s financial system has seen the worst of the stress and passed the test. Yet many observers still have a very grim outlook for the Chinese economy. I daresay even modest improvement would feel like a rebirth of sorts.
Confidence: The missing ingredient
Market liquidity is ample and financial conditions loose, but there has not been a corresponding pickup in banking system loans. And while broader measures of credit seem to suggest that the credit impulse is inflecting, there are few signs that China’s economy is responding to present fiscal and monetary easing. My view is that this response will likely come (and with it, improving growth) when confidence recovers, which could occur in the first quarter of 2023 as policy uncertainty subsides, COVID restrictions ease, and (hopefully) stronger action is taken on real estate. The real estate sector is, in my judgment, the single biggest factor weighing on confidence — even more so than zero-COVID.
Figure 1
The real estate sector: A pivotal factor
For at least the past decade, many commentators have criticized the Chinese government’s lack of action to rein in outsized activity in its all-important real estate sector. Last year, China’s policymakers finally did something about it, leading some to wonder if they may have gone too far. Consensus is now bearish overall, split between those who believe the sector might stabilize soon and those who think otherwise. I am in the former (minority) camp.
I believe the stimuli injected so far — mortgage rates and lending, monetary policy, pledged supplementary lending (PSL), and targeted assistance to property developers — should help the real estate market and put a floor on risk. Easy financial conditions and lower interest rates are already starting to spur demand. (Indeed, mortgage rates in China are now lower than in the US.) Stabilization of the real estate sector would enable a return of confidence, paving the way for a potential economic rebound.
Inflation: Nowhere to be found
Inflation is not an issue for China today, nor do I suspect it will be for a long time to come. In fact, I think China’s inflation is sufficiently well-anchored that even if it were to rise slightly (as it might), it would still not create much of a headwind for the economy.
Chinese core inflation is below 1% as of this writing, while the country’s low level of domestic demand and an absence of direct income support to consumers have kept the commodity price surge from impacting headline inflation to the same degree as in developed nations. Mild inflationary pressures should allow both fiscal and monetary policy easing to continue through much of 2023. Moreover, one silver lining of zero-COVID has been to suppress demand more than enough to prevent a widespread inflation problem from emerging.
Zero-COVID: In the rearview mirror
For the first two years of the pandemic, China’s zero-COVID policy was very effective in minimizing the number of infections and case counts, while maximizing the country’s economic output — until the Omicron variant appeared in late 2021. From that point on, maintaining the policy began to take a heavy toll on the economy. In light of this major trade-off, it became increasingly clear to China’s government that adhering to its current policy stance was more or less incompatible with its economic and social objectives.
In November 2022, pandemic containment measures — lockdowns, isolation, contact tracing — were overwhelmed by a large number of infections. This forced China toward a policy shift, easing restrictions even as case counts rose and accelerating vaccination rates for vulnerable populations. However, the virus spread much faster than anyone (including most epidemiologists) expected. By the first week of January, some provinces and most tier-one cities reported that between 70% and 90% of residents had already experienced COVID. Shortly thereafter, the government liberalized international travel and reopened China’s borders for quarantine-free travel.
While the surge in cases did put an enormous burden on China’s health care system, both empirically and anecdotally, the COVID fatality rate has remained low relative to the global pandemic waves of 2020 and 2021. Notably, so-called “hybrid immunity” is being achieved much faster and with much less disruption than anyone anticipated. As a result, I believe economic and other activity is likely to fully resume by the end of the first quarter of 2023. The markets, meanwhile, are already looking toward this eventual “renormalization.”
Expert
Related Insights
Showing
of
Insights Posts
Analysing the bright outlook in Asia tech
Global Industry Analyst Yash Patodia outlines the state of the Asia tech sector today and identifies potential long-term opportunities in this space.
Article
2024-03-31
China internet: Identifying opportunities amid economic reopening
China’s re-opening and economic recovery from its zero-COVID policy has bolstered our optimism in Chinese internet companies.
Article
2023-12-31
China in 2022: Embracing the volatility
China’s new antitrust, data privacy and cybersecurity regulations, combined with its education and real estate industry reforms, the continued impact of COVID-19 and rising geopolitical tensions, drove a tumultuous investment environment last year. The country’s numerous headline-grabbing changes spurred global concern given the philosophical shift towards “Common Prosperity” and the sheer scale and speed of policymaking.
Continue reading
Quick Take
2023-03-31
Amid heightened regulation and geopolitical tension, is China still investable?
Recent regulatory announcements have sent shivers through a wide swath of China’s economy, including the technology, finance, gaming, and property sectors, and tensions between China and the US continue to simmer. But while I understand the market’s reaction to these risks, I take a long-term perspective on China’s investability.
Continue reading
Quick Take
2022-05-31
Quality-growth investing amid inflation and rising rates
We discuss how today's market impacts growth companies, including which areas are well positioned for the year ahead.
Continue reading
Article
2022-12-31
URL References
Related Insights
Past results are not necessarily indicative of future results and an investment can lose value. Funds returns are shown net of fees. Source: Wellington Management
© 2024 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The Overall Morningstar Rating for a fund is derived from a weighted average of the three, five, and ten year (if applicable) ratings, based on risk-adjusted return. Past performance is no guarantee of future results.
The content within this page is issued by Wellington Management Singapore Pte Ltd (UEN: 201415544E) (WMS). This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. Information contained on this website is provided for information purposes and does not constitute financial advice or recommendation in any security including but not limited to, share in the funds and is prepared without regard to the specific objectives, financial situation or needs of any particular person.
Investment in the funds described on this website carries a substantial degree of risk and places an investor’s capital at risk. The price and value of investments is not guaranteed. The value of the shares of the funds and the income accruing to them, if any, and may fall or rise. An investor may not get back the original amount invested and an investor may lose all of their investment. Investment in the funds described on this website is not suitable for all investors. Investors should read the prospectus and the Product Highlights Sheet of the respective fund and seek financial advice before deciding whether to purchase shares in any fund. Past performance or any economic trends or forecast, are not necessarily indicative of future performance. Some of the funds described on this website may use or invest in financial derivative instruments for portfolio management and hedging purposes. Investments in the funds are subject to investment risks, including the possible loss of the principal amount invested. None of the funds listed on this website guarantees distributions and distributions may fluctuate and may be paid out of capital. Past distributions are not necessarily indicative of future trends, which may be lower. Please note that payment of distributions out of capital effectively amounts to a return or withdrawal of the principal amount invested or of net capital gains attributable to that principal amount. Actual distribution of income, net capital gains and/or capital will be at the manager’s absolute discretion. Payments on dividends may result in a reduction of NAV per share of the funds. The preceding paragraph is only applicable if the fund intends to pay dividends/ distributions. Performance with preliminary charge (sales charge) is calculated on a NAV to NAV basis, net of 5% preliminary charge (initial sales charge). Unless stated otherwise data is as at previous month end.
Subscriptions may only be made on the basis of the latest prospectus and Product Highlights Sheet, and they can be obtained from WMS or fund distributors upon request.
This material may not be reproduced or distributed, in whole or in part, without the express written consent of Wellington Management.
