hongkongen
China flexes its policy muscles – but can they still do the heavy lifting?

China flexes its policy muscles – but can they still do the heavy lifting?

06-01-2022 | Monthly outlook
China’s muscle flexing to fix its problems is set to keep investors cautious until the domestic economy garners more growth.
  • Peter van der Welle
    Peter
    van der Welle
    Strategist SMAS

Speed read

  • Tough policy action aims to reduce inequality and counter populism threat
  • Domestic engines of growth have been sputtering amid real estate crisis
  • Increased signals of policy easing look promising for cyclical stabilization in H1 

The country has initiated several tough policy actions and launched its Common Prosperity program to tackle the main threats to both growth and internal stability. However, the jury is still out on whether these measures will prove effective, says strategist Peter van der Welle.

As the country’s influence extends far past its borders, the Robeco multi-asset team has been taking a neutral stance on both Chinese and emerging market equities in its portfolios, he says. 

“In 2022, China will likely be top of mind for investors, even disregarding the Winter Olympics to be held in Beijing in February,” Van der Welle says. “China as a single country has determined around 30-40% of annual global GDP growth in the recent decade, and it led the global economic cycle into recovery in 2020.”

Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates
Subscribe

Engines are sputtering

“However, in  2021, China’s contribution to global growth faltered on the back of a policy-induced deceleration domestically while developed economies caught up. China’s main domestic engines of growth – real estate, manufacturing and infrastructure – have been sputtering lately.”

“With the monetary and fiscal impulse expected to decrease in the West into 2022, the fate of the Chinese growth trajectory becomes all the more important for the global economy. Therefore, now more than ever, investors should ask themselves: ‘What is on Beijing’s 2022 wish list?’ as the new year is finally upon us.”

China’s economic power is so great that even minor wobbles in its growth trajectory affects other countries across Asia. Emerging market equities have underperformed relative to their developed world counterparts for the past few years, making them less attractive in a multi-asset portfolio.

Common Prosperity

One problem is that the growth in the country’s wealth has not been fairly shared among its 1.4 billion people, leading the government to introduce the Common Prosperity program. China is also seeking to improve welfare for the poorest to stave off any social unrest that threatens the regime.

“In terms of wealth inequality, Chinese society is largely on par with the US, with the richest 1% of households owning one-third of the country’s wealth,” says Van der Welle. “It is President Xi Jinping’s fear that if this inequality persists, it will erode the middle class.”

“This would lead to polarization and the rise of the kind of populism seen in the US, potentially challenging the Communist Party. The Chinese political establishment realizes that the country’s major problems are to be found at home, given a very high total debt-to-GDP ratio of 270%, an ageing population that is starting to gradually worsen the dependency ratio, and increasing environmental costs.” 

Implementation is key

To address these long-term challenges, the Common Prosperity program is concentrated around three troublesome sectors. “Implementation is key, and so policy makers have tightened the thumbscrews on sectors with significant concentrations of wealth and market power, notably the real estate, technology and education sectors,” says Van der Welle.

“For instance, the People’s Bank of China’s (PBoC’s) three ‘red line’ policies – a liability-to-asset ratio of less than 70%, a net gearing ratio of less than 100%, and a cash-to-short-term-debt ratio of more than 1x – amounted to forced deleveraging in the real estate sector. The most infamous casualty of this was Evergrande, which is now entering a debt restructuring process.” 

Hard to read the tea leaves

The question therefore arises as to whether the crackdown has worked, and whether investors could expect an easing of state interventionism in the corporate sector in 2022, which would bode well for Chinese and emerging market equities. 

“The evidence is inconclusive as it is hard to read the tea leaves in Beijing,” says Van der Welle. “The ongoing slowdown in housing sales and Chinese house prices from the crackdown hurts domestic consumption growth as the ’wealth effect’ is eroded.”

“There is historically a strong positive correlation between Chinese consumption growth and domestic house prices, as the largest chunk of household wealth is determined by real estate assets.”  

Don’t forget Covid-19

Meanwhile, the Covid-19 pandemic continues to ravage across the world, led now by the Omicron variant which has caused a new wave of lockdowns. 

“Given the zero-tolerance Covid strategy, and the evidence emerging about the ineffectiveness of the Sinovac vaccine to protect against Omicron (even after a booster), lockdown intensity could increase in China in the near term,” warns Van der Welle. 

“This could additionally suppress domestic demand, even with the Winter Olympics approaching. Chinese policymakers will have to show their agility and ability to slalom around all these downside risks to growth.”

Engineering a soft landing

All eyes will be on the response from the very top. “In order to burnish his credentials as a socialist party leader ahead of the 2022 Party Congress, President Xi will likely be determined to safeguard social stability by engineering a soft landing for the economy in the near term,” says Van der Welle. 

“Easing monetary policy through further cuts in the reserve requirement ration (RRR) and a bottoming out of the credit impulse in H1 2022, along with the use of fiscal stimulus and a loosening of housing regulations are the most obvious policy tools.” 

“The PBOC and the finance ministry have already expressed their commitment in late December to ensure stable growth by hinting on lower taxes and providing reasonable and ample liquidity.” 

But the jury is still out

So, will it be enough?  “Although it is increasingly likely that deleveraging, decarbonization and housing wealth deflation is going to take a backseat as we enter 2022, we remain in the wait-and-see mode,” says Van der Welle. 

“With geopolitical tensions with the US increasing (especially around Taiwan), the incentive for President Xi to bring domestic productivity wins forward in time by continuing his hard-handed interventionist policies is still there.” 

“The Common Prosperity program is not a momentary event. This leaves considerable uncertainty on the table for investors. The potential for Omicron to trigger extensive lockdowns in China around the Winter Olympics is another headwind.”

“Although China’s policy muscles have clearly been flexed, the jury is still out on whether they can still do the heavy lifting. “We remain neutral on Chinese equities and emerging market equities for now.” 

Important information

The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.

Subjects related to this article are:
Logo

Disclaimers

1. General
Please read this information carefully.

This website is prepared and issued by Robeco Hong Kong Limited ("Robeco"), which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 (dealing in securities); Type 4 (advising in securities) and Type 9 (asset management) regulated activities. The Company does not hold client assets and is subject to the licensing condition that it shall seek the SFC’s prior approval before extending services at retail level. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.

2. Important risk disclosures
2. Important risk disclosures Robeco Capital Growth Funds (“the Funds”) are distinguished by their respective specific investment policies or any other specific features. Please read carefully for the risks of the Funds:

  • Some Funds are subject to investment, market, equities, liquidity, counterparty, securities lending and foreign currency risk and risk associated with investments in small and/or mid-capped companies.
  • Some Funds are subject to the risks of investing in emerging markets which include political, economic, legal, regulatory, market, settlement, execution, counterparty and currency risks.
  • Some Funds may invest in China A shares directly through the Qualified Foreign Institutional Investor (“QFII”) scheme and / or RMB Qualified Foreign Institutional Investor (“RQFII”) scheme and / or Stock Connect programmes which may entail additional clearing and settlement, regulatory, operational, counterparty and liquidity risk.
  • For distributing share classes, some Funds may pay out dividend distributions out of capital. Where distributions are paid out of capital, this amounts to a return or withdrawal of part of your original investment or capital gains attributable to that and may result in an immediate decrease in the net asset value of shares.
  • Some Funds’ investments maybe concentrated in one region / one country / one sector / around one theme and therefore the value of the Fund may be more volatile and may be subject to concentration risk.
  • The risk exists that the quantitative techniques used by some Funds may not work and the Funds’ value may be adversely affected.
  • In addition to investment, market, liquidity, counterparty, securities lending, (reverse) repurchase agreements and foreign currency risk, some Funds are subject to risk associated with fixed income investments like credit risk, interest rate risk, convertible bonds risk, ABS risk and the risk of investments in non-investment grade or unrated securities and the risk of investments made in non-investment grade sovereign securities.
  • Some Funds can use derivatives extensively. Robeco Global Consumer Trends Equities can use derivatives for hedging and efficient portfolio management. Derivatives exposure may involve higher counterparty, liquidity and valuation risks. In adverse situations, the Funds may suffer significant losses (even a total loss of the Funds’ assets) from its derivative usage.
  • Robeco European High Yield Bonds is subject to Eurozone risk.
  • Investors may suffer substantial losses of their investments in the Funds. Investor should not invest in the Funds solely based on the information provided in this document and should read the offering documents (including potential risks involved) for details.

3. Local legal and sales restrictions
The Website is to be accessed by “professional investors” only (as defined in the Securities and Futures Ordinance (Cap.571) and/or the Securities and Futures (Professional Investors) Rules (Cap.571D) under the laws of Hong Kong). The Website is not directed at any person in any jurisdiction where (by reason of that person’s nationality, residence or otherwise) the publication or availability of the Website is prohibited. Persons in respect of whom such prohibitions apply or persons other than those specified above must not access this Website. Persons accessing the Website need to be aware that they are responsible themselves for the compliance with all local rules and regulations. By accessing this Website and any of its pages, you acknowledge your agreement with understanding of the following terms of use and legal information. If you do not agree to the terms and conditions below, do not access this Website or any pages thereof.

The information contained in the Website is being provided for information purposes.

Neither information nor any opinion expressed on the Website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. The information contained in the Website does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, most recent annual and semi-annual reports, which can be all be obtained free of charge at www.robeco.com/hk/en and at the Robeco Hong Kong office.

4. Use of the Website
The information is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. Robeco aims to provide accurate, complete and up-to-date information, obtained from sources of information believed to be reliable. Persons accessing the Website are responsible for their choice and use of the information.

5. Investment performance
No assurance can be given that the investment objective of any investment products will be achieved. No representation or promise as to the performance of any investment products or the return on an investment is made. The value of your investments may fluctuate. The value of the assets of Robeco investment products may also fluctuate as a result of the investment policy and/or the developments on the financial markets. Results obtained in the past are no guarantee for the future. Past performance, projection, or forecast included in this Website should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Return figures versus the benchmark show the investment management result before management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark.
Investments involve risks. Past performance is not a guide to future performance. Potential investors should read the terms and conditions contained in the relevant offering documents and in particular the investment policies and the risk factors before any investment decision is made. Investors should ensure they fully understand the risks associated with the fund and should also consider their own investment objective and risk tolerance level. Investors are reminded that the value and income (if any) from shares of the fund may be volatile and could change substantially within a short period of time, and investors may not get back the amount they have invested in the fund. If in doubt, please seek independent financial and professional advice.

6. Third party websites
This website includes material from third parties or links to websites maintained by third parties some of which is supplied by companies that are not affiliated to Robeco. Following links to any other off-site pages or websites of third parties shall be at the own risk of the person following such link. Robeco has not reviewed any of the websites linked to or referred to by the Website and does not endorse or accept any responsibility for their content nor the products, services or other items offered through them. Robeco shall have no liability for any losses or damages arising from the use of or reliance on the information contained on websites of third parties, including, without limitation, any loss of profit or any other direct or indirect damage. Third party off-site pages or websites are provided for informational purposes only.

7. Limitation of liability
Robeco as well as (possible) other suppliers of information to the Website accept no responsibility for the contents of the Website or the information or recommendations contained herein, which moreover may be changed without notice.
Robeco assumes no responsibility for ensuring, and makes no warranty, that the functioning of the Website will be uninterrupted or error-free. Robeco assumes no responsibility for the consequences of e-mail messages regarding a Robeco (transaction) service, which either cannot be received or sent, are damaged, received or sent incorrectly, or not received or sent on time.
Neither will Robeco be liable for any loss or damage that may result from access to and use of the Website.

8. Intellectual property
All copyrights, patents, intellectual and other property, and licenses regarding the information on the Website are held and obtained by Robeco. These rights will not be passed to persons accessing this information.

9. Privacy
Robeco guarantees that the data of persons accessing the Website will be treated confidentially in accordance with prevailing data protection regulations. Such data will not be made available to third parties without the approval of the persons accessing the Website, unless Robeco is legally obliged to do so. Please find more details in our Privacy and Cookie Policy.

10. Applicable law
The Website shall be governed by and construed in accordance with the laws of Hong Kong. All disputes arising out of or in connection with the Website shall be submitted to the exclusive jurisdiction of the courts of Hong Kong. 

Please click the “I agree” button if you have read and understood this page and agree to the Disclaimers above and the collection and use of your personal data by Robeco, for the purposes for which such data is collected and used as set out in the Privacy and Cookie Policy, including for the purpose of direct marketing of Robeco products or services. Otherwise, please click “I Disagree” to leave the website.

I Disagree