With 8,1%, China’s economy recorded its best growth pace in 2021 since 2011. However, there are signs that momentum is slowing. Gross domestic product (GDP) growth cooled to 4% in the fourth quarter of 2021, after the 4.9% growth in the previous three months – depicting the weakest growth registered in over a year and a half.
For 2022, economists are expecting China’s economy to slow further, given the return of large-scale lockdowns due to the spread of the Omicron virus variant. The World Bank has cut its 2022 forecast from 5.4% to 5.1% in December and the Asian Development Bank (ADB) revised its growth outlook for China to 5.3% this year.
However, the 8.1% GDP growth was well over the government’s official annual growth target of 6%. It was backed by steady industrial production that even increased to 9.6% in December, from 3.8% in November. And exports have been an important growth driver. According to official data from financial service provider Wind information, China’s trade surplus rose to $676.43 bn in 2021 from $523.99 bn in 2020, which was the highest on record going back to 1950.
Since December, China’s economic goal now is “stability” and measure are to support the same. China’s central bank, the People’s Bank of China (PBOC), cut its benchmark lending rates this week. The one-year loan prime rate was reduced by 10 basis points from 3.8% to 3.7%, the five-year loan prime rate was lowered by 5 basis points from 4.65% to 4.6%.
Analysts suggest that more easing may be in the pipeline, in an effort to lower financial costs to spur consumption and investment. Thus, the 2022 outlook for Chinese markets could look more upbeat.
”Painful economic restructuring” is over
According to Chi Lo, Senior market strategist APAC at BNP Paribas, China’s growth cycle is turning, as the authorities have shifted away from “painful economic restructuring”.
He expects local governments to lean towards pro-growth policies in 2022 as this was set as a political priority. “The People’s Bank of China will contribute to the efforts to safeguard growth with further monetary easing, especially for the strategic and green development sectors that are high on Beijing’s priority agenda,” Lo wrote in a recent market insight.
While 2021 has been a year with numerous regulatory chances in China, including the tech, gaming, and education sectors, the market strategist suggests that the worst of China’s regulatory tightening campaign is over.
„The policy shift will likely lead to a moderate upswing in China’s growth cycle this year. Structural policies such as striving for greater common prosperity and reducing carbon emissions are likely to be implemented far less aggressively than in 2020 and 2021”, Lo adds.
However, the analyst from BNP Paribas expects fading export growth and new mutations of the coronavirus to be the major short-term headwinds in 2022. Chinese exports growth might weaken, if production and consumption is normalised in the rest of the world. It is also unclear to what extent another outbreak of Covid-19 in developed markets would boost domestic consumption of goods from China, he suggests. “Such demand may have been largely satiated by now.”
China Equity: ”Markets have stabilised”
Chinese equities have had a tough year 2021. However, volatility spikes have proven long-term buying opportunities, says Marcus Weyerer, Senior ETF Investment Strategist at Franklin Templeton. While the start was impressive with Chinese equities having rallied some 20%, outpacing global markets by 14% in less than two month, in November the scenario changed with the Chinese index down 11%, whereas global stocks were up by almost a fifth.1
The underperformance of Chinese equities in 2021 is mostly attributable to the sweeping regulatory measures, according to the investment strategist.
However, “These reforms and sanctions certainly serve an objective that can have a positive impact on the financial markets in the long term,” Weyerer adds. “We believe that regulatory cycles are part and parcel of investing in emerging markets in general, and in China in particular.“
Short-term volatility, as been witnessed for the better part of 2021, is the price to pay. “While there is no indication that the current cycle is at its end, markets have stabilised somewhat since the late summer,” says the Franklin Templeton strategist.
Investors with a positive long-term view of the country and able to accept bouts of volatility should look at China equities.
The country is however still underrepresented in the portfolios of many investors. “The increased inclusion of A-shares in major indices since 2019 has improved the situation, but China exposure in global benchmarks remains stuck in the low- to mid-single digits. While there are questions around access and risk appetite that are reasons for this underrepresentation, long-term investors may want to consider setbacks as an opportunity to increase their positions,” Weyerer says.
China Onshore Bonds: “Low- to mid-single-digit returns”
Similar, Chinese bonds remain largely under-represented on the international bond market. However, China Bonds provide attractive opportunities in 2022, writes Manulife Investment Management.
China bonds (based on the Bloomberg Global Aggregate China TR Bond Index) have outperformed other major bond categories, gaining 6.99% year to date (as of 30 November 2021, in USD). According to Manulife, the strong absolute and relative performance of Chinese bonds in 2021 can be attributed to the Chinese government maintaining a tighter monetary and fiscal stance.
“This has helped Chinese government bond (CGBs) retain an attractive yield level relative to other global government bond yields,” a recent insight states.
Going forward, the Manulife analysts believe that China bonds should continue to benefit from several key drivers, namely the call to re-engage policy easing, sustainable currency strength, and their diversification benefits for global investors.
“We think China onshore bonds are projected to provide low- to mid-single-digit returns for investors, with the PBOC to take moderate easing measures,” said Paula Chan, Senior Portfolio Manager, Fixed Income.
Additionally, CNY strength could continue into early 2022 due to China maintaining an elevated trade surplus, while foreign investor flows into onshore bonds remain strong. “The strength of the CNY should also help create a window for the PBOC to ease monetary policy even when the Fed is embarking on a gradual interest rate normalisation,” says Chan.
Looking at the property sector that has been rattled by the Evergrande crisis in 2021, Chan does not expect the government to trigger a macro hard landing while continuing to reform the sector. “We think the government has enough tools to stimulate this sector and ensure the non-real-estate segment remains intact, such as tax cuts for SMEs, PBOC’s lending facilities, and local government special bond issuances.”
1 data referring to FTSE indices