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China: year of the caged or roaring tiger?

China just started its Lunar New Year celebrations, traditionally hold for sixteen days. But concerns linger about China’s recent economic slowdown and market volatility in 2021 – will the new ‘Year of the Tiger’ produce a roaring or a caged tiger for China?

According to Aegon Asset Management’s Head of Emerging Market Strategy, Sarvjeev S. Sidhu, China is set for a year of more lockdowns as its economy is “kept caged” by tough zero Covid policies, property market problems and sluggish consumer spending and the highly contagious Omicron variant.

For the Lunar new Year, local authorities have imposed travel restrictions and asked locals to stay at home, they same as for the beginning Beijing Winter Olympics (February 4–20). “China’s zero-Covid policy, might last until the end of the Chinese Communist Party Congress in Autumn 2022,” says the strategist.

As a result, government-led stringent lockdowns, manufacturing closures, public transportation suspensions, and port lockdowns are likely to continue to have a negative impact on the service sector’s recovery and consumption.

“China’s long-term growth rebalancing continues”

Sidhu expects the Chinese Government to target growth around 5 to 5.5% in 2022, down from a better-than-expected performance last year. In 2021, China’s economy grew 8.1% year on year, considerably above the government’s target of 6% year on year.

“Broad rate cuts and injection of liquidity should guide markets of a stronger easing bias and help offset the downside growth pressures,” says Sidhu.

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A rapid slowdown in household consumption and sharp weakness in the property market may prompt more People’s Bank of China (PBoC) easing too, the Aegon stratgist says.

Sidhu further expects that China’s long-term growth rebalancing will continuing during the Year of the Tiger, “with targeted and supportive credit policies, including front-loading local government special bond issuance. Accelerating local government bond issuance will be supportive of a pickup in infrastructure investment growth.”

These factors, as per the analyst, could gradually shift towards productive investment and help boost household consumption in the coming years.

However, Sidhu warns that the property sector downturn is likely to continue to drag on the overall economy. “A turning point has not yet been reached but easing property developers’ use of escrow funds and encouraging banks to provide loans for the acquisition of property projects and facilitate M&A is encouraging,” says Sidhu.

He expects the government to speed up the purchase of its assets by buyers that could include other developers and local governments.

China – “diversification and attractive valuations”

Dale Nicholls, Portfolio Manager at Fidelity, in the meantime, believes China might “roar back” in the Year of the Tiger.

“China is certainly at a different stage in the cycle with an easing bias, that history shows often supports markets”, says Nicholls. “Having approached the initial Covid-19 pandemic differently to the loose monetary policy of western governments, China’s central bank has more levers to pull to encourage growth after the slowdown of 2021. The recent cut to the borrowing rate of its medium-term loans for the first time since April 2020 is just one example.”

While 2021 saw a flood of new regulation as well as some tightening of regulations, resulting in a more challenging environment for some business, it is important to keep a long-term perspective, Nicholls says. Furthermore, he sees these reforms have “likely peaked or already passed their peak”.

“As is often the case with broad-based corrections, some stocks with lesser regulatory risk have also been sold off, presenting opportunities. Many smaller companies are down despite the fact they will actually be beneficiaries of regulatory action in areas like anti-trust. Further, the valuation gap versus global peers is now excessive, despite similar regulatory challenges in several markets. With valuations where they are, we believe the risk-reward balance is now clearly in the investor’s favour,” Nicholls assesses.

The Fidelity portofolio manager expects corporate earnings for the market to grow over 15% for the next twelve months. “The market overall is trading on a price earning multiple that is attractive relative to history and relative to other stock markets globally,” he concludes.

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