In focus

China – what now for investors?

The world’s second-largest economy is facing a number of serious challenges at home and abroad, including its zero-Covid policy and trade tensions with the US. 

Earlier this month, China’s ruling Communist Party unveiled the composition of the 20th Politburo Standing Committee (PSC) at its five-yearly Congress, with Xi Jinping confirmed for an historic third five-year term as president. Most of the new appointees to the seven-member PSC are officials associated with Xi, including Li Qiang who was named as Xi’s deputy and is tipped to be the country’s next prime minister.

Like the PSC, the 13 new members of the 24-member Politburo, the party’s second-most powerful group and its executive policymaking body, are also loyalists to Xi.  

Following this news, stock markets in Hong Kong Special Administrative Region and China slumped on concerns that Xi will continue with policies focussed on reducing China’s exposure to foreign interests and influence at the expense of economic growth. At the party’s Congress Xi also made it clear that the zero-Covid policy was here to stay, crushing hopes of a relaxation of the rules in the near future. This rattled markets with fears of further draconian lockdowns in the country. 

The effects of “zero-Covid” policy 

China’s zero-Covid policy, where whole regions or cities are completely closed down with strict restraints on activity in a bid to halt the spread of the virus, is having a significant impact on the country’s economy. Although factories making products for export have been kept open and export trade is going well, China’s domestic economy has been badly hit. 

This year has seen a huge slump in the property market in China, with sales and prices falling and a dramatic decline in construction. Covid policy has played its part by limiting economic activity and squeezing sectors of China’s services economy with property exposure – such as travel and tourism, hospitality and entertainment. 

Covid policy is also interlinked with wider concerns of China closing itself off from the world, as the country’s leadership focuses on economic self-sufficiency, and limiting foreign influences in areas such as education and entertainment. Ongoing trade tensions with the US and Europe, alongside with the country’s military exercises around the island of Taiwan, are also adding to investors’ tensions.  

To understand what this means for investors, a range of Schroders experts gave their views. 

“China will press ahead and intensify its efforts around self-sufficiency, especially in core technologies” 

Robin Parbrook, fund manager and specialist in Asian equities 

“The market correction in Chinese equities highlights investor concerns about the lack of countervailing voices within the new PSC and the risk of potential policy mistakes in the future, given the absence of balancing influences. One potential positive is that the new setup may allow for more rapid execution of policy in the next five years, although markets may not find this reassuring. 

“The market volatility reflects concerns by investors around the shift in the focus of policymakers from the economy/consumption to combating risks/threats in the future. The delayed third quarter GDP data was also weaker than expected. 

“It’s worth noting that the 20th Party Congress report was focused on security. The rising focus on national security is perhaps unsurprising considering the current unfavourable and more challenging external environment. We believe China will press ahead and intensify its efforts around self-sufficiency, especially in core technologies and strategic industries (such as semiconductors) going forward.” 

"China is still committed to growth in the economy"

Keith Wade, Chief Economist at Schroders 

“A lot of the focus after the party Congress has been on the power Xi Jinping now has, but the other point to be made is that China is still committed to growth in the economy. And the aim, or target, of doubling GDP per head of population by 2035 remains in place.

“The Chinese government will still need to deliver a lot of GDP growth, improvements in living standards and improvements in real wages over the next decade or so. However, the fact that it has been able to deliver prosperity to the people is key to what has kept the Chinese Communist Party in power for so long, and they recognise that it is still pretty critical.”

“There is scope for a cyclical upswing, if and when Covid-19 controls are eased more decisively” 

Louisa Lo, Deputy Head of Asian ex Japan Equity Investments at Schroders

“The clean sweep of the politburo is pretty convincing evidence that there is now only one path being considered for China in the next 10 years or so. However, it’s hard to know how much of the market correction relates to the heightened risk over Taiwan and how much relates to more domestic political risks.  

“There is scope for a cyclical upswing at some point, if and when Covid-19 controls are eased more decisively and domestic consumption improves. Foreign investment in China is focused in the consumer discretionary/online areas of the market, together with sectors such as insurance, Macau gambling and commercial property where earnings are depressed due to restrictions and weak confidence.  

"Sentiment has moved markedly negative on China’s structural outlook”

Thomas Wilson, Head of Emerging Market Equities at Schroders

“Investors have become increasingly concerned at the economic consequences of the escalation in geopolitical tension between the US and China as seen in recent US action to limit China’s access to semiconductor technology and expertise. Investors have also disliked the evolution in economic policy towards greater regulation and state intervention and the Congress confirmed policy continuity. Finally, the confirmation that zero-Covid policy would continue was taken negatively – the policy helps to control the virus but is disruptive to growth and the transmission of policy support.

“Sentiment has moved markedly negative on China’s structural outlook. While a higher risk premium may be justified to take account of risks, the cyclical may present an opportunity. The economy is now at a low base, although the global downturn in trade will present an increasing headwind through 2023. The recent newsflow on domestically-produced vaccines bears watching as they may form part of a solution to China moving away from zero-Covid policy constraints."

 


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The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.