As the year of the tiger starts, it is time to get excited about Chinese equities, writes InvestmentOfficer/FondsNieuws columnist Han Dieperink.
Today, the year of the tiger starts. A year ago at the start of the year of the ox, it was time to swap Chinese stocks for Chinese bonds. Economic growth had peaked and so did the earnings cycle. Moreover, Chinese stocks had risen sharply during the first year of the corona crisis.
The contours of the ‘three red lines’ policy were already clearly visible. By now we know how that worked out. Also, the euphoria about Chinese stocks from 2020 seems to be gone for good.
Difficult start to 2022
The year begins for China with major problems in the real estate market. The crackdown on property developers put pressure on economic growth in the second half of 2021. Far fewer new projects are being started. This is partly offset economically by strong export figures. The corona measures in China, due to the zero-tolerance policy, may also weigh on the travel industry and other forms of consumer services this year.
Because of disappointing economic growth, Beijing changed course at the end of 2022. Whereas in the year of the ox it was time for structural reforms and discipline, the priority now is stability. And stability requires economic growth.
The central bank has already cut interest rates several times. This has been done at a gradual and even modest pace. As a result, the impact on the economy is not so great, probably the impact is bigger on the financial markets. Each time there was a positive credit impulse in China, Chinese stocks benefited.
According to the IMF, economic growth in Europe and the United States will be similar this year (around four percent). For China, the IMF is sitting on 4.8 percent growth. Incidentally, there are various parties who believe that Europe will grow faster than China in 2022, which is the first time in forty years. Probably the market is too optimistic about Europe and too pessimistic about China.
Problems for industry
The biggest problem in China’s industry is the shortage of semiconductors. As a result, automakers, among others, were forced to cut production. This particularly depressed growth in the third quarter of last year. In the fourth quarter, the worst seemed to be behind us.
Factories of Volkswagen and Toyota were shut down in the fourth quarter, but this was because of quarantine measures. In China, automobiles comprise about 5 percent of GDP.
Unemployment in China is rising. Not only because factories are shutting down, but also because there is less work in construction. Rising unemployment is a major reason for China to act and boost growth. The last thing the politburo wants is millions of unemployed people in Tiananmen Square.
For investors, bad news about the economy at this stage may be seen as good news for the stock market, as there will be a greater need for a bigger credit boost.
House prices fall
In December, house prices fell by 3.4 percent on an annual basis, but this is already a slight improvement on the 3.9 percent drop in November. House prices are also stabilizing in the second-hand market. The reduction in mortgage rates in January will create more demand for homes, but it will take some time for confidence to return to the housing market.
Compared to other countries, Chinese have a large portion of their savings in the housing market and a very modest stake in the stock market. Since Xi has said that houses are there to live in and not to speculate with, there will be Chinese who will defect to the stock market.
Contrary Chinese monetary policy
China’s central bank cut interest rates by 5 to 10 basis points in several areas in January. It is likely that another such move will be made over the course of the year. However, the central bank is steering not only with interest rates, but also with the reserves that commercial banks must hold with the central bank.
China is aiming for credit growth of 10 to 11 percent. That is a fairly modest credit boost, similar to the one in the year 2019. Last year, the Chinese government spent 2.5 trillion renminbi less than budgeted. That’s roughly equivalent to 2.2 percent of GDP. So there is plenty of room for fiscal stimulus in 2022 as well.
Chinese stock market
Despite the turn in monetary and fiscal policy, Chinese equities have not yet taken off like an arrow from a bow in 2022. This is also due to the price correction in the United States. However, Chinese stocks have been performing relatively better than U.S. stocks this year.
Perhaps the biggest question is when Chinese Internet companies will recover. Since the attack on Ant Financial and Alibaba, other shares in the IT sector, such as semiconductors, have performed much better. First we have to wait for the results of the Internet giants.
On balance, China’s stock market got a lot cheaper last year, a result of sharply rising profits and falling prices. The MSCI China index now stands at 15 times the estimated 2022 earnings. This puts all the fundamental signals in the green. Gong Xi Fa Cai!
Han Dieperink is chief investment strategist at Auréus Asset Management. Earlier in his career he was chief investment officer at Rabobank and Schretlen & Co. He provides his analysis and commentary on economics and markets. This column first appeared in Dutch on Fondsnieuws.nl on 27 January.