China will be very much hoping to see the Year of the Tiger bring confidence and competitiveness − qualities often associated with those born under this sign of the zodiac − in what is potentially a pivotal year of recovery and recalibration. The country continues to contend with the lingering effects of the pandemic as well as the aftershocks of regulatory campaigns launched in 2021 as part of the drive towards common prosperity.
With Beijing playing host to the Winter Olympics in the coming weeks, the event can be seen as a microcosm of the opportunities and challenges facing the world’s second largest economy − with China’s ability to put on a successful Games tested by a zero-Covid policy, foreign diplomatic hostility and questions over cultural freedoms domestically.
The outlook for China at this juncture is inevitably a function of the current situation in which the economy finds itself, and it is worth taking a moment to consider the context of the last two years.
The Chinese stock market enjoyed a notably strong 2020 − despite the ravages of the initial and acute phases of the global pandemic. Having taken an aggressive approach to Covid-19, China took on the mantel of “first in, first out” status, with the early zero-tolerance lockdowns paying dividends by allowing the economy to begin opening up before most others. Indeed, in that year, the MSCI China Index returned an impressive 25.5%, well ahead of most global markets.
However, last year was in many ways a significant reversal of this dynamic, with China giving up the previous year’s gains (and a little more), significantly underperforming emerging and developed markets. To some degree, this was a natural unwinding of the 2020 dynamic − by 2021, the major developed world economies were showing the greater rate of improvement in terms of economic opening up and social mobility, while a lack of vaccine access in emerging markets (including China) was leading to slower incremental economic recoveries. However, the most significant driver for Chinese equities came in the second half of 2021 in the shape of a barrage of regulatory interventions focused on a variety of sectors, from ecommerce and casinos to private education.
All of these interventions can be grouped under the umbrella of “common prosperity”, the aim of which is to foster a more equal society and should be achieved by creating further household income growth, better public services, a stronger social safety net and a narrower income gap between different groups and regions, as well as between rural and urban areas. This continues the project of the past decade of rebalancing the economy towards consumption − especially of the middle and lower portions of the population − and away from investment. Moreover, the intention is to avoid the “disorderly expansion of capital” by establishing a system of governance over platform economies.
At the core of this philosophy is the idea that social stability is more important than growth. With the growth of e-commerce has come inevitable tensions between lower prices and working conditions − take, for example, social media coverage of poor working conditions for delivery men and women for online shopping platform Meituan, and the backlash of a younger generation to the now-illegal “996” work culture (the practice of working 9am to 9pm, 6 days per week). The government is looking to respond to the resentment of citizens, challenge anti-competitive practices and the use of consumer data to entrench monopoly positions.
The short-term effect of these regulatory actions, however, was to raise questions marks over the investability of the Chinese market as a whole. Therefore, a major question to be answered in the Year of the Tiger is whether the regulatory onslaught will ease to give the corporate sector breathing space. At any rate, a number of the targets of regulatory oversight continue to remain critical pillars on which a future tech-enabled consumer-focused Chinese society must be built.
Although the technology companies have come under fire in many regards − whether Alibaba’s $2.8 billon antitrust fine in April last year or tweaking rules around Tencent’s teenage gamers − they also remain central to the social project that China is supporting, the strengthening of its technology capacity in fields such as artificial intelligence and driverless vehicles. Severely reducing the profitability of these companies would imperil China’s mission to achieve technological advancement, a core plank of the development plans of the government.
Early signs suggest that, while common prosperity will remain a focus for the government for years to come, in the short-term, the pressure is easing as policymakers re-focus the agenda on boosting economic growth. The end of 2021 and beginning of 2022 have featured several measures taken to ease liquidity conditions in the Chinese economy.
Importantly, this also comes at a time when financial conditions are tightening globally, led by the Federal Reserve. In China, we have seen a Reserve Requirement Ratio (RRR) cut and a reduction in the Loan Prime Rate (the rate at which commercial banks lend to their best customers), a clear intention to lower the costs of corporate financing and stabilise the real estate market, and we will likely see further policy easing.
We should be careful to note that the intention of this easing is not to fuel a new credit cycle, but rather stabilise the real estate market and wider economy. At any rate, we should see the credit impulse in China continue to turn upwards.
Given the poor performance of the Chinese equity market last year and the incremental policy easing under way, the Year of the Tiger looks in its early stages to be one of incremental recovery. While this may not sound emphatically Tigerish, given the upheaval of the previous two years, incremental stabilisation and recovery, supported by policy easing, is potentially an attractive proposition, especially when viewed against a global economy moving in the opposite direction.
Key Risks
