Overview
When it comes to China, the market sometimes has a short memory and an even shorter attention span. Even so, China’s recent bull market probably prompted a few mental U-turns among those who not so long ago were asking “Is China investable?”
I took a different view back in October, when the Communist Party Congress put Xi Jinping on track for an unprecedented third 5-year term in office and Chinese equities plunged. Many investors saw his appointment as anti-growth, and that the tail risks for China had become the baseline. My colleagues and I saw it instead as the start of a new phase; with the domestic politics settled, the leadership could focus more on boosting the economy. We also anticipated the relaxation of China’s zero-Covid policies - even if the speed with which those were abandoned came as a surprise.
For us, the question has never been about China being ‘investable’ - Fidelity has been building our business in Shanghai, Beijing and Dalian for decades - but rather how should investors best take their exposure to China in a way that both aligns with the country’s domestic growth agenda and navigates the geopolitical complexities of the moment.
It’s a pivotal moment. Tensions are flaring as the war in Ukraine enters its second year. The threat of recession still hangs over the US and Europe - especially if central banks overtighten in their quest to stem inflation. All of this amplifies hopes and fears over China’s own political and economic trajectory, as the world’s second-biggest economy emerges from years of pandemic lockdowns.
The new agenda
I think some of these doubts will be eased this month at China’s ‘two sessions’, the annual full meetings of the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC) that begin 5th March. I expect the meetings will underline economic growth as the country’s top priority for the year ahead, and policymakers will back up these pronouncements in meaningful ways. Specifically, I expect the official GDP growth target to be set close to 2022’s target of around 5.5 per cent, but for actual growth to considerably outperform last year’s 3 per cent reported rate, as economic activity rebounds.
How much fiscal firepower can and will the government deploy to keep growth on track? We see the national budget deficit target coming in at around 3 per cent, up from 2.8 per cent last year, while the quota for local government special bond issuance is also likely to be set modestly higher than last year’s 3.65 trillion renminbi (USD$527 billion at current rates). Along with fiscal support, China’s subdued inflation at home means monetary policy is in play, too. Investors will also be watching closely for any indication that authorities may ramp-up infrastructure investment and ease regulatory restrictions in several areas, including the property sector, providing further stability and potential for momentum in economic recovery for the economy.
The bigger picture
Many see China’s new growth template as marking an inward turn. Promoting domestic consumer spending and homegrown technological innovation will help offset weak external demand and better protect China’s economy from trade disputes, the thinking goes.
But the fact is, China and the US still need each other, and remain extremely important trading partners. US actions to target Chinese industrial development in key sectors like leading-edge semiconductor chips, while blunt, are highly targeted. The same goes for China’s own regulatory actions under its ‘common prosperity’ campaign toward sectors like tech or education: the measures were painful but precise. The market prices in these kinds of new risks accordingly and gets on with it; they shouldn’t fundamentally alter China’s long-term outlook.
And despite all the talk of deglobalisation, China’s economy remains intricately linked to the rest of the world - and especially to its neighbors in the Asia-Pacific. Australia and other regional economies including those of Southeast Asia are likely to enjoy the knock-on effects of China’s current pickup in activity. There are other areas where China’s status as a rising superpower is likely to promote or attract more capital flows. Longer term, we see scope for more reforms to help to rebalance China’s growth away from investment and more towards consumer demand.
These are the kind of slow sea changes that appear suddenly obvious in retrospect. What’s clear now to me is that the world remains, in aggregate, structurally under-allocated to China across the universe of equities and fixed income, and this will only correct over time as China’s weightings in portfolios catches up with its economic heft on the world stage. I would call that investable.
