While China’s border reopening in January marked a seminal shift in pandemic sentiment, investors remain cautious in terms of how they approach allocation to the market. Following nearly three years of Covid-19 contusion which culminated in vast anti-government protests at the end of 2022, those exposed to China’s economy continue to contend with alpha-draining factors, including ongoing deleverage across the real estate sector and heightened geopolitical hostility.
In spite of broader access to China’s domestic bond markets as a result of a series of updates to the Bond Connect scheme last summer, deeply entrenched structural issues and transparency concerns keep foreign investors guarded. This is especially true of the property sector, which has been hindered by corrupt behaviour, slow reform and opaque disclosure around Evergrande’s restructuring, following the company’s $300bn default in 2021.
“Property transactions are starting to stabilise after a year of decline,” Tai Hui, chief market strategist for APAC at JP Morgan Asset Management told FinanceAsia.
“Whether this market can make a full recovery depends on the government’s attitude on the role of residential property as an investment asset,” he added.
Confidence across China’s wider capital markets remains restrained. In November 2022, BlackRock – the world’s largest asset manager by assets under management (AUM) – indefinitely postponed the launch of its China focussed exchange traded fund (ETF), declining exposure to renminbi bonds. The move followed a decision by Japan’s “whale”-sized Government Pension Investment Fund (GPIF) in autumn 2021, to back-track on exposure to British index provider, FTSE Russell’s FTSE World Government Bond Index (WGBI), after it announced the inclusion of Chinese government bonds in the benchmark’s offering.
Meanwhile, liquidity is a lingering issue for the market where bookbuilding is dominated by state-owned enterprises (SOEs) that buy and hold bonds to maturity. However, some experts note near term opportunity for Local Government Financing Vehicles (LGFVs).
Discussing China’s market outlook in the context of global macro factors including rising interest rates as a result of monetary tightening in international markets, recently appointed senior China economist at Commerzbank, Tommy Wu, offered FA his perspective. He brings to the bank’s Singapore base experience from Oxford Economics and the Hong Kong Monetary Authority (HKMA).
“While the bond yield differentials have narrowed somewhat recently, they have remained deeply negative. The negative spread between Chinese and US bond yields will likely persist and remain unfavourable to Chinese bonds through this year”.
FA Editorial Board member, Rocky Tung, who serves as director and head of Policy Research at the Financial Services Development Council (FSDC), agreed that although the removal of largely all Covid-19-related restrictions “should create a strong foundation and momentum for growth, uncertainties associated with external markets, such as the high inflationary and interest rates in developed markets, lead to ambiguity.”
But it is China’s next move following the Two Sessions of the National People's Congress (NPC) and the Chinese People's Political Consultative Conference (CPPCC), that will be watched most closely by analysts. Serving as a barometer for Chinese activity over coming months, the meetings set the tone for China’s strategic priorities and their subsequent impact across the wider regional economic and socio-political landscape.
On Friday (March 13), Xi Jinping solidified his position of power through the commencement of a third term as president of the People’s Republic of China (PRC). The political sessions held in Beijing over a period of ten days marked the last step of the latest five-year cycle of political succession within the Chinese Communist Party’s (CCP). The gathering formalised the announcements first aired around Xi’s re-election, at the party’s 20th Congress, last October.
Back in the autumn, Beijing’s proposed instalment of a new, loyalist leadership team for Xi’s third term evoked fears around a focus on state control and security, over economic and business-focussed supportive policy. But the appointment over the past weekend of Li Qiang as party premier and Xi’s right-hand, may to some extent, alleviate woes.
“Premier Li Qiang’s appointment is not a surprise to the market as he’s the second-ranking Politburo Standing Committee member,” Laura Lui, partner and co-CIO of Asia-focussed ETF investment firm, Premia Partners told FA.
The former leader of the country’s biggest city by urban population, Shanghai, oversaw the city’s strict Covid-19 lockdowns. In his new capacity, he takes on responsibility for stimulating China’s lacklustre economic growth, and replaces Li Keqiang, who ahead of his retirement, delivered his last government work report at the conference.
Lui said that Qiang’s long-term relationship with Xi is likely to provide room to handle economic policy with a degree of freedom. Additionally, his two decades of experience working in Zhejiang, Jiangsu and Shanghai “may help him push for the economic development that the country needs”.
She described the party’s move to keep in place central bank governor Yi Gang, finance minister Liu Kun and commerce minister, Wang Wentao, as pragmatic, adding that their extended appointments “may boost investor confidence at a time of uncertainty, given the suggestion of policy consistency.”
Li Keqiang’s final document in office outlined the market’s forward looking economic plan and revealed a modest GDP growth ambition of “around 5%” for 2023. The figure is notably lower than that set out for FY 2022. In spite of setting its GDP ambition at 5.5%, last year saw China achieve an overall growth rate of 3%.
Wu believes that the new target sends mixed signals.
“[It] suggests that while growth is important, the government cares about other policy objectives such as financial stability,” he wrote in a market outlook last week.
He highlighted that the central government will be reluctant to put too much pressure on local governments to boost economic growth given the financial stress they are facing in terms of reduced revenue from taxes and land sales, and a surge in government debt.
“From a more cautious viewpoint, the unambitious growth target points to a more subdued outlook. It may signal that the government is likely to implement more moderate policy easing than previously expected,” he noted.
But Hui considers the move appropriate. “Taking into account both structural and cyclical factors, the government’s growth target is realistic and achievable rather than being conservative.”
Tung echoed this, underlining that the party’s target is not dissimilar to external estimations. He drew a parallel with the latest projection for China's growth by the International Monetary Fund (IMF), at 5.2%.
“In a year with growth in the US and Europe decelerating or possibly going into recession, a 5% growth target for China is respectable,” Hui told FA.
He pointed to falling demand for China’s exports from the US and Europe as directly impacting the market’s economic rebound. For the first two months of 2023, export growth fell by 6.8% YoY, he emphasised.
However, Lui alluded to the tactical nature of the move, suggesting that an “easy” target might help to lift both international and domestic spirits.
“An interesting observation is that there has never been two consecutive years of missing target in the past three decades. Last year was a miss….” she noted.
Alongside the challenges presented by China’s push towards post-pandemic recovery, escalating trade tensions and retaliation on the back of supply chain disruption have caused the market to gravitate towards a localisation drive and to prioritise tech-fuelled domestic innovation.
Wu’s commentary stressed how Beijing’s shift in policymaking aims to balance economic development with the maturation of its national security strategy.
“The work report reiterates plans on digitalisation and innovation, industrial upgrading, self-reliance on technology, tackling real estate problems, green development, and further opening up for foreign investment.”
“In particular, special funding to support the development of semiconductors and other strategic industries will increase substantially this year.”
JP Morgan’s Hui asserted that an industrious, domestic focus will most likely complement a rebound in consumption in a market that needs to build confidence to draw investment.
“China’s policy on nurturing new industries such as semiconductors and other technological hardware to reduce dependence on imports, renewable energy and electric vehicles could be a growth area in the medium term,” he offered.
“In terms of digital innovation, the most notable upgrade is in terms of payment and how it is linked to people’s consumption behaviour and daily life,” Tung told FA, sharing his experience of a full transition to digital payments upon a recent visit to Guangzhou.
“Covid-19 has expedited the transition. China-watchers may want to see if the return to normalcy will have any impact on the digitalisation trend.”
Discussing how the removal of travel restrictions will boost the market’s digital developments, Wu said, “The Greater Bay Area (GBA) has a lot of potential as it combines the breadth of tech sector in Shenzhen, the depth of financial sector in Hong Kong, and the vibrant and vast market that Guangdong provides. Now that the borders have reopened, cross-border activities are set to restart.”
“Both Guangdong and Hong Kong governments should capitalise on the renewed push to integrate the region after stagnated for three years due to the pandemic,” he implored.
Great Wall (of steel)
Adding to rising tensions on the global stage, is aggressive rhetoric.
During the Two Sessions, last week Xi broke precedent by criticising the United States and its western counterparts for pursuing a policy of “containment and suppression”.
After thanking delegates for his unanimous re-appointment, the president addressed attendees with a message explaining that he would “build the military into a great wall of steel that effectively safeguards national sovereignty, security and our development interests”.
However, media reports highlight the more conciliatory tone offered by Qiang as he stated how closely intertwined China and the US remain in terms of economics, to the benefit of both sides.
Analysing the discourse, Lui shared, “It is understandable for president Xi to voice his concerns publicly against any unfavourable policies introduced by the Biden Administration.”
“At the end of the day, he’s responsible for taking care of 1.4 billion people and the world’s second largest economy. Asian, emerging market and European investors are more tolerant to the geopolitical risks, but the US investors remain relatively cautious.”
“Geopolitically, maintaining a decent relationship with communist countries whilst involving itself in the international stage with other developed countries is always challenging,” Lui concluded.
“Global investors will be watching the new leadership team closely to gauge whether the Chinese economy is on a steady growth path,” Hui opined.