Market Views: China GDP expands 8.1%, but downward trend expected
China's official 8.1% GDP growth rate last year was higher than expected — but it’s not without its challenges. Investors are being conservative in sectors like property, and expect more opportunities from cyclical, consumer and technology sectors, as well as niche assets such as solar stocks and electric vehicle (EV) battery stocks.
“Although the latest GDP number beats expectation, the trend of slowdown continued in China’s economy with YoY real GDP growth of 4% reported for 4Q 2021 (4.9% for 3Q 2021), and investors’ expectation for EPS growth has not improved due to this data release,” Chaoping Zhu, global market strategist at JP Morgan Asset Management, told AsianInvestor.
Andrew Fennell, senior director, Asia-Pacific Sovereigns at Fitch Ratings, also remains cautious on China’s growth this year. Fitch forecasts China’s economy will grow by 4.8% in 2022, according to the latest note published on January 18.
“In mainland China, we expect macro-policy easing to advance in early 2022, following a 50bp reduction to banks’ reserve requirement ratios in December 2021. This will include a cut of the policy rate, albeit symbolic, accompanied by a modest acceleration in credit growth. Widespread property-sector and financial-contagion risks should be averted, as strategic adjustments to macro-financial regulations stabilise market confidence and refinancing conditions,” Fennell said in the statement.
On January 17, the government’s central bank offered Rmb700 billion ($110 billion) worth of one-year medium-term lending facility (MLF) loans to some financial institutions and conducted Rmb100 billion of seven-day reverse repos to maintain liquidity in the banking system, providing support for liquidity easing.
AsianInvestor has compiled commentary from investment analysts, fund managers, and economists on how China’s economic growth could look like this year, as well as what type of assets might be favoured.
The following responses have been edited for brevity and clarity.
Alec Jin, investment manager, Asian Equities
abrdn
Liquidity issues continue to plague some highly levered property developers, while a resurgence in Covid-19 cases and China’s zero-tolerance approach to Covid are disrupting economic activities and weighing on consumption. Amid these uncertainties, we favour high-quality companies with good management track records, competitive advantages, and strong balance sheets. They will be best positioned to navigate any volatility.
For investments, we have identified several key themes. Firstly, aspiration. We buy into China’s premiumisation story. We believe its growing middle-class wealth and urbanisation will drive demand for premium goods and services in the long run, with the baijiu segment a key beneficiary. Secondly, digital, especially in cyber security and cloud services. This fits in with Beijing’s objectives of increasing localisation, improving productivity, lowering costs, fostering innovation, and propelling growth.
Thirdly, green. This includes renewable energy and storage, which aligns with government policy on decarbonisation and net-zero emissions by 2060. Fourthly, health. Cheaper and more accessible healthcare is becoming increasingly important as China’s population ages rapidly. We favour healthcare services, including firms providing innovative research and clinical trial services that bring high-quality therapies to market cheaply and quickly.
Hyomi Jie, portfolio manager
Fidelity International
As expected, the credit impulse began bottoming last November and we expect to see further improvements as Chinese policy makers signal more accommodative measures. The regulator’s quicker than expected decision on gaming licenses for casino operators in Macau also supports an overall easing direction. At this juncture, China’s policy direction is indeed very different to the indications of more hawkish policies globally and regionally. From a portfolio perspective, China’s policy cycle bodes well for quality/growth stocks versus yield/value stocks.
I’m mindful that the market hasn’t factored in enough downward earnings pressure. It’s worth noting the recent de-rating of consumer discretionary, EV and healthcare stocks. While we have already seen a big part of earnings being cut over the past few months, when and where this will bottom out remains uncertain as the earnings downcycle is still at risk of getting dragged down by a potential hard landing of the property sector and/or global supply chain bottlenecks exacerbated by geopolitical issues or Covid-related issues.
Zhu Chaoping, global market strategist
JP Morgan Asset Management
In 2022, opportunities might exist in three themes: 1) Cyclical sectors related to infrastructure investment when domestic investment is supported by government projects. 2) Consumer sectors may outperform when CPI inflation rebounds and sector leaders raise product prices. 3) Technology sectors with strong upside in earnings and favorable government policies, such as alternative energy and technology hardware.
However, challenges still remain in both domestic and overseas markets, therefore it is important for investors to stay diversified in their portfolios with a focus on quality companies. Over the longer-term investment horizon, we see attractive investment themes including carbon neutralisation and self-sufficiency in key technologies, although investors need to remain patient and selective amid market volatility.
Zheng Wenli, portfolio manager, China evolution equity strategy
T. Rowe Price
China is experiencing a policy-induced slowdown but there are signs that the government is shifting to an easier mode that is targeted. We believe that China has enough tools to engineer a soft-landing of its economy and the government is signalling that its focus has shifted to maintaining stability in the economy. The macro environment is turning incrementally more positive for Chinese equities.
We are seeing interesting opportunities beyond the widely owned mega-cap names and the energy transition, electric/smart vehicle, and high performing computing are three mega themes for the next five to ten years. This also brings a great opportunity for investors to see beyond the obvious beneficiaries such as solar stocks and EV battery stocks, and to identify under-discovered opportunities along different parts of the supply chain at less demanding valuation, such as grid automation and auto parts. We also see tremendous consolidation opportunities in service industries, such as hotel chains, as we believe that the service industry will likely be home to many future earnings compounders.
Moreover, we focus on leading players in various niche industries; many are mid cap companies in industrials and business services segments. We expect the niche industry leaders can offer strong growth potential at a reasonable price.
Jessica Tea, senior investment specialist, Greater China equities
BNP Paribas Asset Management
Stabilising GDP growth was the top priority for China in 2022 — where they articulated their willingness to maintain stability in credit growth, increase support to small and mid-sized enterprises and green lending as well as facilitate consumption upgrade. With such pro-growth policy shift from difficult economic restructuring, this means that the peak of the regulatory tightening campaign might also be over, although this scrutiny is not fully done yet.
We believe the following themes offer long-term opportunities as the sectors benefiting from these structural trends are positioned for sustainable growth – innovation and technology, consumption upgrading and industry consolidation.
Innovation-focused theme (e.g. selective internet-related platforms, Taiwan and Chinese local semiconductors, industrial upgrade, energy transition-related companies). Consumer upgrading (e.g. consumption, health care, life sciences). We foresee these major themes standing the test of time regardless of external factors such as COVID-19. Ultimately, we remain selective in our bottom-up stock picking approach focusing on the highest quality growth companies with sound or improving ESG profiles.
Jason Liu, head of CIO Office Asia
Deutsche Bank International Private Bank
From recent economic data we see growth continuing to be most pronounced in high-tech manufacturing sectors, as well as the social sectors such as health. We expect to see more investment opportunities in Chinese equities later this year, particularly after the announcement of more monetary and fiscal policy easing measures.
We think that policy tightening in certain sectors could continue in line with the government’s longer-term objective of ‘’common prosperity”. Q2 may be a turning point for Chinese and EM equities as Chinese authorities ease some Covid-related restrictions and the reopening of ASEAN economies picks up the pace. Headwinds for 2022 may stem from the Omicron outbreak which remains a risk because China will continue to pursue its zero-Covid policy. The property sector remains the key risk, though credit policies have already been cautiously eased. Therefore, property sentiment could improve as economic recovery gains momentum later in the year.
Shao Yuting, macro strategist
State Street Global Markets
Investor sentiment for Chinese assets will rebound after the PBoC highlighted stabilising growth would be the priority, signalling the worst of regulatory crackdown measures could be over. Cheap valuations and lower rates bode well for the equity market.
In particular, growth sectors with long duration should benefit from lower rates; the finance sector could benefit from valuation and liquidity-induced credit expansion, while infrastructure building related industries ride the wave of PBoC’s front-loading support. And last but not least, digital economy and green energy have strong potential given they align with China’s long-term policy objective.
Wang Hanfeng, chief strategist
CICC
The 4Q21 GDP growth was actually largely in-line with CICC macro team’s expectation. China’s Q4 yoy growth continued to moderate compared in Q3 and suggests that China’s policy adjustments to boost economic growth we have seen so far are well warranted.
We believe growth stabilisation will remain one of main investment themes in China equity market over the next a few months, when Chinese policy makers are strengthening efforts to stabilise economic growth. Market sentiment may continue to improve, and in the meantime those macro related areas, including infrastructure, construction, building materials, and financials, etc, may outperform in this stage.
Gary Ng, senior economist
Natixis Corporate & Investment Baking
The stronger-than-expected GDP growth is built on a downward revision of 2020 number (from 2.3% to 2.2%), which does not change the trend that the economy is decelerating from the cyclical rebound. With the pressure on consumption and exports, the wild card for economic growth is on investment. This implies more expansionary fiscal and monetary policies, which is the key factor in boosting investors’ confidence and can bring GDP growth to 5.2% in 2022.
The traditional sectors dominated by large firms may benefit more from fiscal stimulus, especially infrastructure and energy. The laxer monetary condition may also help the banking sector if the loan growth rebound significant enough to offset the fall in net interest margin. But this also means the divergence may persist for sectors with tighter regulations in internet platforms, and to a lesser extent for real estate, with some marginal relaxation recently. It is not a question of whether valuation is cheap enough, but when the regulatory uncertainties can be cleared up, at least partially.
Wang Shengzu, managing director, global head of asset management
Haitong International
Looking ahead, while strong headwinds remain, we expect China’s growth profile will gradually improve in 2022 with still-weak H1 growth followed by a pickup in H2 given the impact of policy support. Also we don’t believe 2022 annual growth will fall below 5% given the economic fundamentals and political wills.
In the near term, an easing monetary environment should be good news to the stock market and A-share has historically reacted more positively to an improvement of domestic liquidity. In terms of sectors, consumer stables, infrastructure-related, and information technology could outperform as they are more growth-exposed. In the long term, high-end manufacturing, digital economy and green economy will provide good investment opportunities.
Chen Dong, head of Asia macroeconomic research
Pictet Wealth Management
While the Q4 GDP number turned out to be stronger than expected, the headwinds to growth remained strong, particularly in terms of the deceleration in the property sector and soft household consumption. The data for December show that momentum in these areas remained weak.
The good news is that macro policies are turning more supportive. Following the RRR cut last month, the PBoC cut the policy rate by 10bps, which translated into lower LPR. In our view, there could be further cuts in both RRR and interest rates in the near term. On the fiscal front, we also expect stronger local government bond issuance to support infrastructure investment, which has been improving since mid-2021.