It was tragically apt that last year was the Year of the Rat as Covid-19 spread from China around the world. While China was the first country to experience lockdowns, the country controlled the virus effectively and brought the economy back to growth in the second quarter and was the only major economy to expand in 2020.
The Chinese economy is now growing at a similar rate to that before the virus and life has largely returned to normal in much of the country. Industrial activity has fully recovered and retail sales growth moved into positive territory last August. This is in stark contrast to many other nations, which still sit under nationwide lockdowns and are yet to face the tough task of repairing the damage from Covid-19. Looking forward, effective vaccines have provided a path towards a global economic recovery and, as we start the Year of the Ox, we will be watching the development of key themes in China.
Vaccine Rollouts
As vaccines are delivered across the world, we should see lockdowns ease and economies begin to recover. Governments will be thinking about how best to restore consumer confidence and get their economies back on track. Cyclical companies that are levered to economic growth should benefit from the renewed activity, which include companies in the financials, energy and consumer discretionary sectors.
In China, while the industrial economy has fully recovered, consumption growth is still below pre-pandemic levels. In line with the long-term goal of transitioning to a domestic-driven and service-led economy, the Chinese government will likely place emphasis on rejuvenating the consumer economy in the Year of the Ox. Focus will be placed on structural issues such as raising the minimum wage, allowing more rural to urban migration and strengthening social safety nets, all enabling more spending. This will be coupled with more specific and targeted policies, such as relaxation of restrictions on auto sales to the benefit of auto manufacturers. Furthermore, with the government’s aim to increase consumer spending together with a population that is likely to still be wary of travelling abroad this year, the government may encourage more domestic tourism once the virus is contained, to the benefit of travel agents, hotels and duty free companies.
Technology companies will be key in propelling the transition to a consumption-driven economy. The technology sector performed incredibly well in 2020 as the pandemic accelerated the shift to ecommerce and remote working as people spent more time online. We believe that these new habits will persist going forward and those companies, such as portfolio holdings: JD and Meituan, that have capitalised on these shifts will continue to benefit. There is still room to grow, especially in smaller cities and in products such as grocery, which remains underpenetrated for online sales.
There are obvious risks to the recovery story: if there are further outbreaks, delays in vaccine deployment or if vaccine efficacy is called into question, the recovery will take longer.
A New US Approach to China?
The Year of the Rat also saw further deterioration in the relationship between the two superpowers. Tensions rose as President Trump placed sanctions on targeted Chinese companies and prevented US investors from purchasing specific Chinese stocks such as China Mobile and Xiaomi.
President Biden has already indicated that he will take a more unilateral approach to dealing with China and this could mean moving away from a strategy of trade wars and blacklisting companies towards international treaties and agreements. While Biden is likely to have a different approach, it is now clear that competition with China is a bipartisan issue and relations will not return to where they were before Trump came to power.
Something else that will not change is China’s resolve to reduce dependence on foreign markets in supply chains. Trump’s campaign to shut off technology exports has encouraged China to invest further in its technology industry to ensure supply of essential equipment in the future. China will make increased efforts to support home grown industries, especially in key technologies such as 5G, semiconductors and AI. A suite of measures including support for research, education and financing will benefit the technology sector and will extend to companies in sectors like software and cloud computing − two companies that we like in these sectors are Kingsoft and Kingdee.
China’s Strategic Plan
China will announce its 14th five-year plan in March, which will indicate the direction that the government wants to take the country over the medium/long term. Encouraging consumer growth and supporting key domestic industries will be central, although it is clear that China also has significant climate ambitions.
President Xi Jinping announced in September that carbon emissions in China will peak by 2030 and the country will be carbon neutral by 2060. This surprised the global community as it would involve a drastic change in the country’s energy supply.
Fossil fuels currently account for 85% of China’s energy mix and the country is well-known for being the world’s largest carbon emitter. However, there will now be a rapid change of course and an acceleration of decarbonisation. The push towards renewables benefits the country in many ways. As well as a cleaner environment, it also increases energy security by reducing China’s reliance on imports and helps to cement leadership in a key industry of tomorrow. China is ahead in many areas of clean tech: it is the world’s largest battery manufacturer, produces more than 70% of the world’s solar panels, half of its electric vehicles (EVs) and a third of its wind power. It also controls much of the raw materials needed in clean technology supply chains.
Xi will announce more details of the new energy plan, and increased renewable installation goals will be beneficial for companies along the renewables supply chain. Our positions in solar glass manufacturer Xinyi Solar and wind turbine manufacturer Xinjiang Goldwind stand to be two such beneficiaries. Companies in the EV space will also benefit from a move to electrification.
Climate change is also an area that Xi and Biden can agree on – Biden has made climate change a central issue of his administration and has already announced executive orders on conservation, the promotion of EVs and restricted oil drilling. He has also re-joined the Paris Climate Accord, and if the two leaders can reach an agreement on a climate action strategy in the coming year this will no doubt provide further benefits to related companies.
