China – Economically Inspiring – Investors’ Corner
China was the first to recover economically from Covid-19. However, its stock markets do not reflect this: stocks have been under pressure since the Chinese New Year. This should come as no surprise as China’s growth momentum is fading. This is a consequence of Beijing’s efforts to curb credit growth in order to limit financial risk. In addition, export growth slowed as the rest of the world started producing again.
Likewise, the growth of consumption in China has disappointed. Consumer spending has suffered from heightened financial strains triggered by Beijing’s debt reduction and structural reform policies, preventing more debt from being repaid and making consumers uncertain about their income .
However, it makes sense to contain credit growth. Debt reduction can hurt in the short run, but in the long run it leads to a more robust financial system and keeps inflation under control.
Margins under pressure, but stock prices hold
Inflation has operated at two speeds. The producer price index (PPI) rose 9% year-on-year in May, while the consumer price index rose only 1.3%, with core CPI rising further 0.9%.
Businesses are feeling the consequences. As production costs rise sharply, revenue growth lags, reducing profit margins. Still, Chinese stocks have barely budged this year. However, they also did not fall. This indicates that companies have been able to offset the effects of declining margins by improving operational efficiency.
As for sectors, demand for consumer staples, health care and information technology has remained strong since the start of the pandemic, leaving companies in these sectors with pricing power. This contrasts with automakers and hobby companies which have all suffered major disruptions due to the blockages. We believe that companies with strong pricing power should continue to outperform the market at large.
China’s central bank takes the pulse
The People’s Bank of China is expected to ease monetary policy in the coming months as economic growth remains uneven, with the recovery on the demand side of the economy still weaker than on the manufacturing side.
The pressure increases for the PBoC to release the reins. The main reason is government pressure to grow the economy by at least 6% per year. However, any action by the central bank is likely to be limited.
Investors should not count on a cut in policy rates or a massive injection of liquidity since the PBoC will not want to thwart government policies. Instead, it could provide additional liquidity and enable selective credit growth to ensure a healthy balance between growth and debt reduction.
Potential upside in share prices
Analysts expect PPI inflation to peak soon due, among other things, to the normalization of commodity prices as tensions on the global supply chain ease. At the same time, consumer inflation is expected to remain subdued at around 1.4% due to a weak recovery in consumer spending.
If the PPI were indeed to peak this summer, the pressure on corporate earnings should ease, creating a more favorable environment for Chinese equities in the second half of 2021.
These promising prospects would be strengthened if the PBoC relaxed its policy. This would remove much of the uncertainty currently hanging over the market.
What about regulations?
Like the EU and the United States, China has started to attack the omnipotence of big tech companies. The actions to date have been vigorous given the rampant growth of FinTech companies in the country. As Chinese regulations were lagging behind, authorities are now catching up.
Investors would have to assume other even stricter regulations. This will likely affect the valuations of many tech companies. Conversely, Chinese technology companies, like many other innovative companies, should be able to benefit in the years to come from policies that remain focused on strong growth and efforts to reduce as much as possible any technological dependence on it. foreign countries.
As a result, there should be good opportunities to invest in Chinese technology, biotechnology, aeronautics, artificial intelligence, electric cars, and companies focusing on quality consumer products.
Reduced bond risks
The outlook for Chinese bonds is also improving. International investors have only very recently entered this approximately $ 15 trillion market, which is the second largest bond market in the world. With the three major rating agencies now allowed to rate Chinese debt, more foreign investors may feel encouraged to buy Chinese debt.
While confidence in the bond market has been strengthened by these developments, it remains essential for investors to do their homework. With the Chinese government allowing public companies to go bankrupt, the risk of default has increased, although over time this greater openness to defaults should benefit China’s debt solvency.
No future for bitcoin
Since most bitcoin is mined in China and this has a significant impact on energy consumption, bitcoin mining directly challenges China’s sustainability goals. As a result, Beijing has banned bitcoin mining in China, setting an example the rest of the world may well follow.
Another concern is the anonymous nature of trading in bitcoin and other cryptocurrencies, which could undermine efforts to contain crimes such as fraud and theft.
To control financial risk, the bitcoin market needs to be regulated. Here too, China is not alone. More and more central banks are considering issuing their own digital coins. This allows them to remain in charge of their policies, while also allowing crypto trading to flourish.
All opinions expressed herein are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may have different opinions and make different investment decisions for different clients. This document does not constitute investment advice.
The value of investments and the income from them may go down as well as up and investors may not get their original stake back. Past performance is no guarantee of future returns.
Investing in emerging markets, or in specialized or small sectors is likely to be subject to above average volatility due to a high degree of concentration, greater uncertainty as less information is available. available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less security than the majority of developed international markets. For this reason, portfolio transaction, liquidation and custody services on behalf of funds invested in emerging markets may involve higher risk.