Overview
Key takeaways
- Management confidence trends downwards as analysts believe China is in the later stages of the business cycle
- Softening demand viewed as a bigger drag on the outlook than inflationary pressures
Since the onset of the Covid-19 pandemic, China has often been an odd one out among regions - usually for the better, sometimes for the worse. The world’s second-largest economy initially led the global recovery from the crisis, enjoying an export boom when much of the world was struggling with lockdowns.
Now, with confidence holding up in most other regions where restrictions are easing and recovery from Covid-19 continues, sentiment in China is turning downwards. A third of our China analysts report a drop in management confidence about investing in their businesses in the year ahead. This compares to a global average of 9 per cent, with only the result from emerging Europe, the Middle East, Africa, and Latin America showing a bigger dip in confidence. Meanwhile a quarter of China analysts say they expect management confidence to rise, a lower proportion than most other regions.
“How would you describe the confidence level of your companies’ management teams to invest in their businesses over the next 12 months compared to the last 12 months?” Source: Fidelity International Analyst Survey 2022.
Chinese regulators have tightened oversight in sectors from internet to real estate, education, and healthcare, seeking to implement long-run reforms that have nevertheless hurt short-term growth and confidence. The property sector has borne the brunt of regulatory crackdowns which, combined with slowing consumer demand for homes, have contributed to defaults among already over-stretched developers and have created headwinds in related sectors like construction, cement, glass, furniture, and home appliances.
Asked where their sectors stand in the business cycle, 21 per cent of the China analysts point to a slowdown phase, the highest proportion among regions globally, while another 4 per cent choose “recession”, also the highest of all the regions. Globally, only 8 per cent of analysts report a slowdown and 1 per cent think their companies are operating in a recession.
Not surprisingly given the general outlook, China analysts are among the most pessimistic about the outlook for overall returns on capital at the companies they cover. A quarter of them forecast an overall decline in returns on capital over the next 12 months, the second highest proportion among regions.
Asked to name the key driver of weakness for returns on capital, 57 per cent of those China analysts anticipating a decrease point to slower end-demand growth, the highest among regions, with just 14 per cent of this cohort citing rising costs.
Inflation is expected to be milder than elsewhere, with 29 per cent of China analysts believing inflationary pressures will ease in the next 12 months, the highest proportion among regions, while another 36 per cent expect little change. This contrasts with the global average, where over two-thirds of analysts expect inflationary pressures to rise over the next 12 months compared to the previous 12 months.
It’s also worth noting that China is the only region where analysts believe, on balance, that inflation is more structural than transitory. “Underinvestment in fossil fuels may lead to a structurally higher oil price,” one analyst covering Chinese industrial firms notes, referring to government measures to cut fossil fuel use in the country’s drive towards net zero by 2060.
Despite weaker business sentiment, there are encouraging signs of progress in the disclosure of environmental, social and governance practices among Chinese companies. For example, 25 per cent of China analysts say the firms they cover make good-quality climate-risk disclosures, up from just 4 per cent a year ago. This is apparent even in the highest-emitting sectors. “Almost all the companies I cover have shown an increase in interest in and efforts around ESG,” notes an analyst covering Chinese materials firms.
China is likely to remain the odd one out in 2022, with its recent steps towards easing policy providing further contrast to the tightening happening in other major economies.
