David Chao, Invesco
China’s slowing economic growth at the hands of Covid-19 has further dented consumer sentiment and consumption.
Since the end of 2020, Hong Kong and mainland Chinese equities have clearly underperformed their US counterparts. Approaching the end of the third quarter, for example, Chinese equities are lagging US markets by around 40%.
“Now this divergence is wider than the one seen during the taper tantrum in 2013, and the bursting of the Chinese equity bubble in 2015. Even European indexes have fared far better than Chinese equities and Hong Kong equities this year,” said David Chao, global market strategist of Asia Pacific (ex-Japan) at Invesco.
Earlier in 2021, underperformance was largely attributed to China’s slowing economy amid the re-appearance of Covid hot spots in different provinces around the country.
Yet industrial production has slowed over the past few months as global consumers transition from spending on goods to services and experiences. At the same time, Chinese policy in the property sector has started to take a toll on fixed asset investments and forays into real estate, while infrastructure has also suffered in recent months, Chao added.
Policy shifts shaking investors
More recent underperformance has been attributed to stricter regulatory oversight on key industry sectors.
“Largely unheard of just a year ago, ‘common prosperity’ is the 2021 buzzword. For Chinese markets the term was mentioned by over 70 major Chinese companies in their latest earnings announcements,” Chao said.
As policymakers try to narrow income inequality, sectors such as real estate development, internet platforms and for-profit education are facing regulatory headwinds. Other private companies providing what are considered public services such as healthcare, housing, assisted and elderly care could be the next to face scrutiny, he elaborated.
Further, gaming and live streaming companies could face increasing price control regulations and, potentially, limits on commercial activity. Chao said he believes in order for these companies to survive, the owners will have to prove to the government that they are contributing to the common prosperity goal.
Encouraging signs emerging
But Chao also pointed to the continued deleveraging in China’s property market as potentially bringing longer-term benefits to the economy, in turn supporting growth objectives.
He expects the central bank to cut the reserve requirement ratio in the coming months and to see more robust local government bonds to support infrastructure investments. The government has also had held talks with local Chinese banks to ensure loan growth remains sturdy for the rest of the year.
It is also encouraging to see Chinese policymakers recently unveil additional details about the GBA.
“While we are not out of the regulatory woods yet in China, this positive government action makes me more optimistic on the unloved asset class. It’s a good sign that policymakers are demonstrating to the market that they have carrots as well as sticks in their regulatory toolbox,” said Chao.