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In 2021, China’s prioritization of “common prosperity”, its tightening of conditions for the real estate sector and its regulatory crackdown in sectors such as the internet economy rattled investors. But what is the outlook for this year? Ning Meng, China A-Share Strategy Leader at Neuberger Berman, assesses the economic development and the investment opportunities the structural changes in China are opening up.
AsiaFundManagers.com: China sticks to its Zero-covid policy, at the same time economic growth is weakening. What can we expect from the Chinese economy in 2022?
Ning Meng: The Chinese economy began to show signs of slowing down in the second half of 2021, which could be attributed the tightening of policies following the strong economic recovery in 2020. For example, the tightening of monetary policy in early 2021 and the crackdown on certain industries.
As a result, since the start of 2022, the Chinese regulators have begun to relax certain policies. The central government has set a tone of “maintaining growth and stability” and the People’s Bank of China has also begun to ease the monetary policy. We believe that more fiscal and industrial policies will be introduced to ensure stable economic growth in the first half of this year.
It will take some time for us to see the actual results of these easing policies. In our view, the Chinese economy may initially decline in 2022 and potentially head towards a recovery in the second half of the year.
AsiaFundManagers.com: Common prosperity has become the underlying theme of Chinese political discussion. What is behind it and how does it affect the Chinese stock market?
Ning Meng: Common prosperity is a theme that any economy must face when it develops to a certain stage. China is already the second-largest economy in the world. After undergoing high growth because of economic reform and opening up over the past four decades, the economy will inevitably enter a stage of lower growth with more of a focus on public welfare. This has also served as the precondition to ensure that the economy can maintain its growth for a longer period in the future.
From the latest policy changes, we believe China is indeed initiating a structural change within the broad economy. These changes are meant to steer it towards more sustainable growth and shared prosperity. They do not want to drastically reduce or eliminate the function of the market or capital, or damage public interests such as privacy infringement that have accumulated over the past decades due to economic development. They want to resolve issues related to monopoly and fairness.
We also need to bear in mind that common prosperity does not mean fairness is the only goal to be pursued. “We will first make the cake bigger, and then divide it properly,” President Xi Jinping told the World Economic Forum earlier this month, acknowledging that strong, stable growth is a prerequisite for common prosperity.
And from the investment perspective, of what we really need to be aware are the structural changes that are taking place; and really try to identify areas of investment opportunities and risks in the stock market.
AsiaFundManagers.com: China’s regulatory measures against big tech dominated the Chinese stock market in 2021. Will regulation also be the decisive factor in 2022?
Ning Meng: I would call these regulatory measures against big tech “antitrust measures”. These exist in any economy. US regulators have always taken antitrust measures. Antitrust is critical for guaranteeing fair market competition and consumer rights and interests.
For 2022, our initial assessment is that the crackdown on big tech will be slightly eased due to three main reasons:
– Antitrust measures are already making progress
– Regulatory measures, including better labour protection and benefits for employees, youth protection, and huge amounts of punitive measures (e.g. fines), have been implemented
– Big tech firms are essential to economic growth and employment. We believe stable development of these big tech firms under the scrutiny of the central government is what we are likely to see.
AsiaFundManagers.com: Growth and technology stocks have driven the Chinese stock market in recent years. Which industries and sectors are most promising this year?
Ning Meng: “Growth and technology stocks have driven the Chinese stock market”. I think this sentence itself is only partially correct.
This is correct for the Hong Kong stock market and the ADR market, and in fact, we observed the same trend in other markets in the world, for example, the US stock market. In these markets, due to global liquidity, growth stocks and tech stocks have significantly outperformed other stocks.
Growth and technology stocks are the main Chinese stocks available to investors in the H-share market and the ADR market. There, if they outperform, investors think they are the only Chinese stocks that outperform.
However, if you look at the China A share market, it is a completely different story. The A-share market is more comprehensive. In the past few years, high-quality A-share companies in the other sectors such as the consumer, manufacturing, and even financial sectors have achieved very good performance. Therefore, growth and tech stocks are not the only things driving market growth.
In light of this, our investment philosophy has been to invest in leaders of various sectors at reasonable valuations to participate in their growth story in the long-term while ignoring short-term fluctuations.
High-quality companies in the consumer, medical services, advanced manufacturing, and new energy sectors are those that we are positive about in the long term.
AsiaFundManagers.com: Evergrande and the real estate sector have kept the markets busy in 2021. Real estate is one of the most important sectors, with banks having large exposures. What is the outlook for the real estate sector?
Ning Meng: The performance of real estate companies will remain diverged in 2022. Overall, the central government will not change the direction of regulating the real estate market.
However, to prevent major problems in the real estate market, to ensure economic growth, and to guarantee that housing is delivered as scheduled without causing panic among homebuyers, we believe there will be changes and moderate loosening in policies.
Real estate companies with high leverage ratios and liquidity problems, especially private real estate companies, will still face great capital pressure and the risk of default. However, those high-quality real estate companies with sound financial ratios, especially SOEs, may benefit from the credit easing of banks. These companies could have the opportunity to obtain funding support, and lower their land costs, in addition to acquiring the assets of distressed real estate companies. Therefore, investors need to distinguish opportunities from risks in their investments.
AsiaFundManagers.com: China A shares have performed weakly in 2021 with 3.36% and the start of the new year has also been rather weak with -8.8%. What is the current case for investing in China A shares?
Ning Meng: At the beginning of 2022, capital markets around the globe were impacted by the Fed’s tightening monetary policy, and universally declined. The China A share market was not immune to that. But looking forward from the current time point, we are relatively optimistic on the China A share market, mainly due to the policies.
First is monetary policy: as the Fed is tightening, the PBOC is currently easing. Compared with other economies, the Chinese economy has more liquidity. The PBOC’s monetary policy has hedged against the Fed’s tightening to a certain extent, which has not been seen in other large economies. From the perspective of global asset allocation, the China A-share market has more liquidity than other markets.
The second is fundamentals. We have always emphasized that in addition to monetary policy, the Chinese government is also introducing fiscal policies and industrial policies to maintain stable economic growth. With the support of these policies, we will see the economy gradually bottom out and rebound, fueling improvement of the fundamentals of listed companies. We believe that the stock market will reflect the change in economic fundamentals.
We believe policies change always precedes the change in economic fundamentals and the capital market, which is typically dominated by negative factors and short-term market sentiment. It will take some time for the market to see the effect of these policies and bottom out, but it is also a great opportunity for investors to consider quality assets at lower valuations.
AsiaFundManagers.com: Thank you very much for the interview.
Ning Meng
China A-Share Strategy Leader
Neuberger Berman
Ning Meng joined Neuberger Berman in 2019. He is the firm’s China A-Share Strategy Leader, based in Shanghai, and a Senior Portfolio Manager. He is part of the Emerging Markets Equity team. Meng has over 20 years of industry experience.
