31 Jan 2022
Contrary to enjoying a smooth ride in 2020, the Chinese equity market experienced much more volatility in 2021.
Economic growth and corporate earnings continued to be on a solid footing, but policy initiatives, focused on sectors ranging from technology to real estate and energy, sparked concerns among global investors.
We understand where these concerns are coming from. Changes are removing the comfort of certainties and stirring up fears. As an on-the-ground, long-term investor, we believe China has entered a new development era.
Policies we are seeing now are constructed to shift the economy from a growth-driven one to a quality-focused one that aims to promote a sustainable future.
Figure 1. China trades at a discount to global equities; Premium/discount of 12m fPE
In this outlook piece, we will discuss our latest thoughts on these policies and how they will shape our investment views in 2022.
The idea of common prosperity is not entirely new and was shared by many leaders preceding Xi Jinping. It is a fundamental goal of the government to provide a better life to the people.
China has achieved phenomenal growth but it has come with consequences. Growth is imbalanced across regions, industries and households. In addition, the people are beginning to complain about a worsening environment and burdens within housing, education and healthcare.
Common prosperity is raised to address these issues. It is a comprehensive development concept aimed at promoting quality growth, social wellbeing, and environmental sustainability.
We believe common prosperity is the overarching objective in the country. This has led to policy focused on internet regulations, the property sector and China’s emission ambition.
In the 14th Five Year Plan (2021-25), there is a dedicated chapter on accelerating the digital economy. It is clearly stated that China aspires to raise the share of the digital economy (core sectors) to 10% of GDP in 2025.
Policymakers are aware of China’s growth challenges, such as an ageing population and a declining return on investments. Any future growth will need to come from a productivity boost driven by continued innovations and technological advancements.
The technology sector comprises of mostly private enterprises. These private enterprises account for around 60% of GDP and more than 80% of urban employment. Also, they are generally more productive than state-owned enterprises (SOEs).
Among listed firms, the average productivity gap between SOEs and private enterprises is around 20%. Beyond these hard numbers, technology is deeply embedded into everyday life, transforming the way people shop, eat, travel, and entertain.
We believe the government has no intention to undermine the sector. Its focus is targeted on the socially vulnerable and the financially risky (fintech and its linkage to broader financial system).
Its aim is to promote a digital environment that bolsters fair and healthy growth and that cares about social wellbeing.
We believe communication regarding these regulations has become clearer recently and more focus will be placed on execution. This presents attractive buying opportunities among those companies less impacted by regulatory actions such as e-commerce, food delivery and gaming.
The property sector has recently attracted lots of news headlines. Many investors are worried about default risk and believe this represents a tightening stance from the government. We believe the government is attempting to walk a fine line between promoting growth and maintaining financial stability.
Tightening or easing would be an easy characterisation of this balancing act. If we look back at policy directives over the past years, from supply-side reform, to the deleveraging campaign, to the three red lines on property developers - the government has been consistently aiming to reduce macro-level risks and avoid a sharp slowdown in growth.
There have been good results from previous efforts, evidenced by the shrinkage of shadow banking credit and slower expansion in corporate leverage. More importantly, we believe this represents a change in mindset that acknowledges that the growth formula from the past is no longer valid, and that capital needs to be deployed in productive areas.
We expect the government to continue with its current data-dependent approach and keep growth within a reasonable range.
China has pledged to reach peak carbon by 2030 and carbon neutrality by 2060. These emissions ambitions are leading to increased efforts in decarbonisation.
In July, China launched its national carbon emissions trading scheme (ETS). This brings together pilot schemes that have been running since 2013 in eight provinces/cities. In September, the government pledged to stop financing new coal-power projects overseas. The investment appetite for renewables is strong as renewable power is set to account for over half of total installed capacity by 2025.
We believe decarbonisation efforts will continue to accelerate and provide investment opportunities in related areas, including renewables and the electric vehicle (EV) supply chain.
We expect demand for investment products with an environmental/carbon focus to be increase as end investors are becoming increasingly aware of the investment opportunities and the risks associated with climate change. Our funds have historically had a low carbon footprint given our focus on the services and clean energy sectors.
We believe policies in 2022 and beyond, branded under the broad objective of common prosperity, will continue to have a positive impact on equity markets.
While this new development era will be different from the past, we remain confident that investors will again be drawn by the opportunities offered in China. We believe China remains a compelling asset class and worthy of a standalone allocation.
Risk-adjusted returns in the past were strong and we remain confident that investors will be rewarded if they invest for the long-term.
Risk warnings
Investment in certain securities listed in China can involve significant regulatory constraints that may affect liquidity and/or investment performance.
Important information
By accepting this marketing communication, you consent to communicate with us in English, unless you inform us otherwise.
Data as at 31.10.2021, unless otherwise stated.
This is marketing material and not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication.
Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice.