Chinese officials were afforded the opportunity to address structural imbalances by the strong rebound in global growth, driving strength in Chinese exports, and a high likelihood that the domestic economy would exceed its annual growth target.
Authorities boldly moved the economy into a credit downcycle, applied macroprudential regulations to property developers and the housing market, whilst also enacting a broad antitrust and regulatory reset. In aggregate, this moved policy from ‘loose’ in 2020 to ‘tight’ in 2021, with Chinese and Asian risk assets feeling the effect of tighter liquidity conditions, regulatory headwinds and the prospect of weaker economic growth.
The economic effect of these tightening measures has begun to be felt in recent quarters, with the Chinese economy now slowing, and it is highly likely that growth will continue to weaken in the coming quarters as the lagged effects of tightening continue to feed through. As a result, Chinese policy makers have pivoted.
As well as having longer-term plans, policy makers have typically managed the economy in the shorter-term on a calendar year-basis. While 2021 presented a window of opportunity to address structural imbalances, 2022 has now clearly been flagged by China’s Politburo - the country's top-decision making body - as a year where “stability is the top priority”.
To be more specific, in November last year the People’s Bank of China’s third quarter monetary policy report deleted three key phrases that were in prior reports:
This opens the door for easing in 2022, in our view.
Following this, the phrase “stability is the top priority” appeared post December’s Politburo assembly, while the meeting summary removed references to regulation and called for “support for a sustained recovery in consumption”, “supporting the sound development of the property sector” and “pushing for social housing construction”.
Finally, the Central Economic Work Conference – an annual meeting which sets the national agenda for the economy – highlighted the need for conventional fiscal and monetary easing, while praising the positive role played by capital in the economy – a stark shift from the language in late 2020, which focused on “curbing the disorderly expansion of capital” and “antimonopoly”. We believe that policy has clearly pivoted, easing is coming, and some of the policies of the past year that hampered financial markets (regulation and deleveraging) will take a backseat for the time being, as they have at other times in the past decade, while authorities seek to stabilise the economy in 2022.
Although downside risks to the economy remain, we take Chinese policy makers at face value. With China being a command economy with a relatively closed capital account, we believe it’s more likely than not that the economy will go where policy makers push it. As noted above, Chinese growth is likely to weaken further in the coming quarters but increasing action by policy makers adds to the likelihood that risk markets can look through any such domestic weakness, all else being equal. Obvious external risks to Asian markets remain in the form of extended developed market asset valuations and our expectation for faster than expected Federal Reserve tightening, which we have highlighted previously.
In summary, we see this as a macro-opportunity; risk premia are elevated in China and the broader Asian market, sentiment is depressed, and policy change will likely lead to a more constructive future macro and market backdrop. As a result, Chinese and Asian companies that have long-term structural growth potential and sit within areas of tailwinds on our thematic roadmap (Road to 2030) look attractive, in our view, as does Asian high yield.
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