Is China still investable despite its economic policy shake-up?

September 2, 2021

Ken Peng

Head of Asia Investment Strategy

SUMMARY

Despite China’s policy overtures aimed at rebalancing the distribution of economic gains more towards labor and less towards capital, we believe it is not totally abandoning market capitalism.

In August, China’s President Xi connected the dots between the myriad policy actions taken this year, and the government’s commitment towards achieving “common prosperity”. Some in the market interpreted Xi’s policy goals as a systemic plan to take from the rich to give to the poor, which is understandable, but this is an oversimplified view of a complex and comprehensive development plan.

We believe China’s turn towards “common prosperity” is not sudden. Rather, it is a drive that started several years ago and merely accelerated in 2021. This has understandably caused many to worry whether China is still investable.

However, we believe it is. And we try to address several key investor fears about China in terms of the outlook for investor perception, competitiveness, innovation, access to capital and ESG standards in our latest Asia strategy bulletin.

While we see continued efforts towards common prosperity, we also see it as conducive to expanding the middle class and to make economic growth more sustainable. Regulations of the technology industry are likely to move towards tightening globally, with China’s now among the more stringent.

Despite fears to the contrary, China has not turned its back on capitalism. An even bigger reason for sticking with market-based developments is having a globally accepted reserve currency. Breaking free of USD dominance is a key element to China’s path towards international competitiveness. The country’s leadership, including Xi, recognize that strong capital markets are critical in this endeavor.

In the recently released 14th Five-Year Plan to Develop the Shanghai International Financial Center, ambitious targets were set for transaction volume and direct financing. More importantly, goals were set for foreign ownership of bonds, and “Shanghai pricing” for commodities. Fintech was also a main area of development, which may seem unconvincing given the Ant experience, but setting up a robust regulatory framework can be an important pre-condition for sustained development.

Attracting foreign institutional investors has clearly gotten a setback in recent months. But, we believe it remains a goal, as authorities continue to create more tools for risk management that had been a pain point for foreign investors, such as rolling out index futures in Hong Kong.

The wealth management industry remains an attraction for foreign institutions, especially if the private pension and insurance businesses are more open for entry.

Earnings are likely to be hardest hit in 2021, followed by gradual recovery. Valuations have adjusted downward substantially. Even though they’re not at the absolute historical bottom, they already point to potentially strong 12-month returns.