China’s policy tightening is nearly complete

May 27, 2021

Ken Peng

HEAD - ASIA STRATEGY

Shanghai morning city skyline silhouette over river with sunrise and Oriental Pearl Tower

SUMMARY

One of the key features of global equity markets so far in 2021 is the underperformance of Chinese equities. The correction prices in a lot more potential bad policy news. But we believe the risks of additional policy tightening in China have diminished. Indeed, policy may pivot towards a less hawkish stance in the second half of the year.

We believe that China’s policy tightening is nearly complete, and Chinese equity performance could improve in the second half of the year. On credit, while majority state-owned financial asset management company Huarong continues to gather attention, we believe it is systemically important and relatively inexpensive to save. Broader default trends are actually improving. The pace of credit expansion is also likely to stabilize in the second half.

The tightening in tech regulations continues, but is already advanced in the fields of anti-trust, fintech and data handling. We believe the underperformance of Chinese tech on policy tightening is likely to reverse some in the second half of the year.

COVID resurgence in Asia is concerning, but also receding, due to greater vigilance in prevention, which proved could contain past waves. Greater vaccine availability in the second half of the year could help Asia to partially re-open, though clearly lagging the US and Europe.

The Chinese Yuan (CNY) has appreciated against the USD by 10% in the past year. This was mostly due to the pandemic response by the Fed, but also aided by the PBOC’s relatively tight monetary policy, which caused Chinese yields to rebound earlier, along with China’s earlier start of recovery. We believe that at this point, the CNY is at or near fair value, and further moves are likely to be more moderate.