Macro Minutes: China: Reasons for Optimism

Title screen appears, “Macro Minutes. China: Reasons for Optimism. Presented by Austin Fraser, Fisher Investments Japan Research Analyst & Portfolio Engineer on behalf of Fisher Investments and its affiliates.

A man appears on the screen in a grey suit in a home office. He begins to speak.

Austin Fraser: Hi, my name is Austin Fraser and I'm a research analyst and portfolio engineer here at Fisher Investments. And today we're going to be talking about the reasons to be optimistic for Chinese equities.

A graph appears on the screen with the title, “Easing Chinese Regulations. Escalating Chinese regulations spooked investors and contributed to a Chinese and Emerging Markets bear market in 2021. However, Chinese regulators have changed their tone recently. Below are some examples of easing regulation.”

Austin Fraser: So beginning in July of 2021, the Chinese government instituted a very strong regulatory push that weighed heavily on the sentiment for Chinese equities and was a big reason, in our view, why you saw a bear market in emerging markets as well as Chinese equities. But recently there's been some positive developments in Chinese shares have rallied fairly considerably. They're the best performing market since mid-March. And you've seen things like the first batch of video game approvals in April and first time in nearly a year.

Austin Fraser: And again, we saw more video game approvals coming in July. Other things like the cybersecurity probe ending for Didi Global Dotcom, allowing it to accept new users for the first time at some time, as well as bigger macro things like compromises from the Chinese government with the US government related to the Holding Foreign Companies Accountable Act that threatens to delist Chinese shares. All of this, in our view, has removed a major headwind to equities. And you can see on the chart here that Chinese equities have rallied fairly considerably. This, in our view, is likely to continue.

A new graph appears on the screen with the title, “Economic Growth Typically Accelerates in Party Congress Years.”

Austin Fraser: The government's highest priority right now is economic stability. And some of that has to do with the lockdowns that you've seen over the past several months. But another reason is very much political in nature. Every five years, China has its largest political event, the party Congress, and that will happen later this year. And you can see by this chart here that economic growth tends to accelerate going into those party Congress years. And that makes some logical sense given that the government wants to promote stability and good order before it goes into this major political event. And part of the way that they do that is through stimulus.

A new graph appears on the screen with the title, “Credit Growth Typically Accelerates into Party Congress. Credit growth often accelerates ahead of China’s Party Congress – next schedule for October 2022 – which could support China’s economy this year.”

Austin Fraser: This year has seen significant stimulus so far, in part because of the lockdowns, but there's also a political element to it in our view, because credit growth actually bottomed back in October of last year. As you can see at the top chart here on the slide, we expect this trend to continue and credit growth to accelerate in the second half of this year. You can see on the bottom chart the credit impulse, which is really the second derivative of credit growth, is turned from deeply negative to positive.

Austin Fraser: Moreover, the government has talked about bringing forward local government bond issuance for the first time from next year. It's also not just credit that's been a part of the stimulus measures. The government has introduced a significant supply side tax cuts from about 3% of GDP. You take all of this stimulus together and its one reason we believe the economy should stabilize in the second half of this year and most likely be better than expected.

A new graph appears on the screen with the title, “Signs of Economic Activity Rebounding Post-Lockdowns. China’s lockdowns negatively impacted economic growth, but history suggests the effect will be temporary.”

Austin Fraser: As I mentioned, lockdowns have clearly had a negative impact on economic growth, but history tells us that that effect is most likely to be temporary. And we can look at examples in the developed world as well as China in 2020. You see the chart here on the left in the slide, which plots GDP from the pre-pandemic level. Essentially measuring how quickly does economic activity recover following the restrictions put in place. And you can see the developed markets which are looking at the US, UK, Europe and Japan. Then on average they recovered fairly quickly from those restrictions in 2020.

Austin Fraser: China also did as well in 2020, but of course the most recent outbreak has led to further decline in economic activity. We'd expect that to rebound very meaningfully here over the course of a few months, and we've gotten some initial encouraging signs within the June data table here on the right. And the slide shows you some of the major economic indicators for China and how they came in much better than consensus in June, as well as accelerated from May.

Austin Fraser: Now, China is unlikely to lift its zero COVID policy, in our view, at least not anytime soon. But officials have built significant infrastructure following the most recent lockdowns, including things like mass testing that should allow for a much more targeted and localized approach to managing COVID outbreaks. This means, in our view that the ultimate economic impact of future restrictions are going to be significantly less because you're unlikely to see the large widespread lockdowns like you saw in Shanghai and Beijing.

Austin Fraser appears back on the screen.

Austin Fraser: And thank you very much for watching today. If you have any more questions about our views, please reach out to your relationship manager.

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