China has been in the headlines recently as its anticipated post-Covid rebound did not live up to expectations and momentum has been short lived. Instead of a recovery to robust consumer spending, infrastructure investment, and relatively strong economic outlook compared to the rest of the world, the momentum was short-lived. This development was disappointing, especially given China's initial successful containment of the pandemic in 2020.
We have had an increasing number of queries on the region recently, despite it making up a small part of the Waverton Managed Portfolio Service (MPS), so have shared our views below.
A significant concern for local authorities over the past decade has been the property sector, which normally accounts for about 30% of the country's economic output. Regulatory measures were introduced in August 2020 to curb developers from carrying excessive debt, threatening the stability of this critical sector, which could (due to its size) have wide reaching effects on the rest of the economy.
While the basis for these regulations had merit, the resulting uncertainty in operations for the country’s largest property developers – leading to the collapse of Evergrande, which was once China’s second largest property developer worth $51bn – has plagued both consumer and business sentiment.
In addition to the immediate impact, the timing of the property regulations amplified uncertainty post-Covid, which was further compounded by significant regulations imposed on the technology giants and education companies in 2020 and 2021. The repercussions are evident: consumer savings are growing and private sector loan growth is declining, as both corporates and consumers behave more conservatively to protect against more hardships in the near future.
Separately, China's decision to stop reporting its youth unemployment data has raised eyebrows and concerns; the last known figure was an alarming 21%. There are several theories on why this number has ballooned in recent years, including the increasingly cautious stance from the corporate sector limiting headcount expansion and the significant hit to the hospitality sector after three years of Covid-related disruption. In addition, we cannot overlook the wealth effect of China’s one-child policy.
Over the 35 years that China imposed a one-child policy, Chinese GDP per capita grew from around $200 in 1980 to $8,000 in 2016 when the policy was abolished. The resulting wealth creation has been directed to just one heir per family, potentially giving that individual more financial independence and the freedom to delay entering employment after graduating. This unique dynamic further complicates the current economic scenario.
While the present economic landscape may seem challenging, we believe that Chinese equity valuations are discounting significant uncertainty in the near term. If the authorities can stabilise the property sector, we feel this will be a meaningful positive development for both consumer and corporate sentiment in the region.
However, as significant fiscal stimulus appears unlikely at present, we anticipate some stabilisation of comparative economic figures in the next year, as opposed to a significant rebound. We are also looking to see whether the recent policy support for the property sector will have a meaningful impact.
Alena Isakova is lead manager of the Waverton Strategic Equity Fund. The views expressed above should not be taken as investment advice.