The Chinese New Year, also known as Lunar New Year, falls on February 1, and will usher in the Year of the Tiger! In Chinese culture, the tiger symbolizes bravery and strength, as the Chinese people often refer to it in traditional sayings like “spirited dragon and dynamic tiger” or “soaring dragon and leaping tiger”. The Tiger is the third animal of the 12-year cycle of the Chinese zodiac and this year is the year of the Water Tiger. In Chinese philosophy, there are five Elements (wood, fire, earth, metal, and water) which represent aspects of nature that interact in predictable patterns that are associated with their own “life force” or “chi”. Each element represents a different type of energy, and is associated with certain qualities, colors, shapes, and materials. The water element is associated with a running current, a river, or a waterfall – not static. This denotes fluidity and flexibility.
WHAT TO WATCH OUT FOR IN CHINA DURING THIS COMING YEAR OF THE WATER TIGER ?
Econopolis’ take is that it will be a very dynamic year, with opportunities to be grabbed as the Chinese financial market presents itself favourably . There will also be a lot of unpredictability ahead.
- Zero-COVID policy
The COVID-19 pandemic has entered its third year, yet the new Omicron variant still continues to disrupt global economy as many countries’ social loosening and travel relaxation measures are jeopardized. And China has adopted a zero-COVID policy that will possibly not ease up until the Chinese Communist Party’s 20th National Congress in late 2022. Whether it is the right approach or not, China argues that the country would have had millions of cases if the nation did not mandate the preliminary lockdowns. It believes the supply-chain crisis would have been worse, and its economy might have suffered a recession that has since been avoided. While the strict policy hurts consumption and economic activities, China economy expanded 8.1% last year, far exceeding the government’s own targets. However, we observed weakening growth in the closing months of 2021 (4% in 4Q21), suggesting that the country is contending with issues, ranging from the deepening real estate crisis, renewed COVID outbreaks leading to several cities’ lockdown and continuing US-China geopolitical tensions.
- GDP target likely 5%
China indeed is facing strong growth headwinds at this moment and the pandemic took it more rapidly to the trough. On a positive note, 22 Chinese provincial-level administrative regions had recently released government work reports that give hints of an expected GDP growth target of 5% or above for 2022. Among the local government work reports, the key frequently mentioned topics include technological innovation, the digital economy, dual carbon goals (peak carbon emissions and carbon neutrality), high-end manufacturing and new infrastructure. These work reports of local governments have followed the central government’s plan to stabilize growth and to achieve China’s long-term growth target to double the economy within 2020 to 2035 (equating to an average annual growth rate of 4.7% during this period). We believe Chinese policymakers possess the willingness and tools to defend its growth target, but not be overzealous with stimulus.
- Easing cycle underway
In fact, a new easing cycle has started in China, with a credit up-cycle and a rate cutting cycle now underway to cushion its slowing economy. Although rising inflation is a global phenomenon, some gauges of Chinese inflation rose at a slower-than-expected pace than the West. We believe inflation, at a broader perspective, has looked far less worrisome in China and there is room for further easing. Excess liquidity will likely find its way for a cyclical recovery in the second half of this year. This is encouraging for the Chinese assets as opposed to the US where Fed has pivoted to a more “hawkish” stance at the start of the year due to rising inflationary pressures.
- High-quality development
However, China is not pursuing high growth but high-quality development economy growth. In 2020, GDP per capita surged to CNY70,000 or US$10,435. Nevertheless, income disparities have grown. There are still some 600 million people who live off a monthly income of CNY1,000 (US$154 or less). President Xi sees these disparities as a threat to stability. Thus, China has made it clear that moving forward, they strive for more visible and substantive progress in the well-rounded development of individuals and the common prosperity of the entire population- denoted as “common prosperity” of China. “Common prosperity” is ‘not to rob the rich to give the poor’ as feared by investors. It meant that any reforms that are necessary should adhere to the welfare of the people and high-quality development of the country in order to realize common prosperity. In its push for quality economic development and a better living environment, we are expecting accelerating development of scalable renewable energy (wind, solar, biomass, geothermal, ocean and hydrogen) and decarbonization technologies (electric vehicles) as the structural growth story for the decades as China plans to reach peak emissions before 2030 and achieve carbon-neutrality by 2060.
- Consumption-led and self-sufficiency
Also, China has embarked on a new “dual inward circulation” strategy with its economic growth plan to rely on domestic consumption and promote self-sufficiency. As such, imports are being substituted by domestic output (unless it cannot produce), and race to achieve 70% self-sufficiency in high-tech industries (chips, AI), those that are considered highly strategic. China’s rebalancing of its economy from investment-led growth to consumption has been relatively successful and Beijing’s longer-term goal has been to reduce reliance on debt-fueled investment (including property) to a broad-based consumption. Policies include increasing employment or wages and transferring income. China’s economy enjoys a good momentum overall and the fundamentals of China’s economy remain unchanged.
- Normalization in regulatory actions
China’s string of regulatory interventions has depressed the digital, education, healthcare, and entertainment/content sectors the past year. In 2022, we expect the industry participants to largely complete the rectifications, and some to do so in 2022. While the rectifications may drag down their earnings growth, we still expect industry leaders to gain market share among the weaklings and most of their structure growth story to remain intact. We are hopeful that those operating in accordance with the new regulatory frameworks will resume their earnings momentum once the regulatory dust settles. For China, reform and opening-up is always a work in progress. Investors have since recognized that Chinese market is a policy-led economy. Nonetheless, we do believe China will continue to let the market play a decisive role in resource allocation. Its regulatory interventions/frameworks are targeted to build a unified, open, competitive, and orderly market system, where all businesses enjoy equal status before the law and have equal opportunities in the marketplace.
- Leaping higher
As a fun respite from investment analysis and for those who follow Feng Shui, the CLSA 2022 Feng Shui Guide (meant to be taken with a pinch of salt) predicts the Hang Seng Index will move swiftly to ensure it stays just out of Water Tiger’s reach and leaps higher and higher. The only exception is August, when the Tiger is enjoying an after-meal bask in the sun and clearly not moving. It expects a good beginning to the year to turn sour in March before returning to steady growth and peaking over the summer. A pause and a fall early into the autumn occurs before the market picks up again into winter, finishes on a high note.
All in all, it appears to be a year of the tiger who is not crouching to devour us but pouncing on opportunities. Econopolis wishes all of you a year filled with opportunities, prosperity, and good health.
Senior Portfolio Manager for the Emerging Markets funds at Econopolis