China ‘…policy shift is now quite clear’ says Ninety One’s Mahtani

Did investors panic after China’s Party Congress in October? It certainly looks so. Both the Hong Kong stock exchange and Chinese high yield credit are up by a third in the seven weeks since the meeting, and the market narrative has shifted at extraordinary speed in at least three ways, as Ninety One Strategist Sahil Mahtani highlights in the following update:

 First, investors were expecting policymakers to continue with China’s draconian zero-Covid policy. Instead, policymakers pivoted. In mid-November, they announced a 20-point plan to soften quarantine and testing requirements. After protests against Covid restrictions erupted in major cities, policymakers responded on December 7th with a further easing of quarantine and testing requirements.

Second, investors were expecting policymakers to keep up the pressure on the private sector that began at the December 2020 Politburo meeting. There, terms like “anti-monopoly” and “curbing the disorderly expansion of capital” first entered market consciousness. Instead, in the December 2022 Politburo statement, policymakers stressed “two unwaverings”. These were unwavering support for the public sector and unwavering support for the private sector, language last mentioned in the halcyon days of 2018.

Third, Chinese policymakers made it clear in the December 2022 statement that their policy priorities for 2023 were about “significantly boosting market confidence” and “expanding domestic demand.” To some extent that direction of travel was already evident in the 16-point plan announced mid-November to stabilise the property sector.

To be fair, stabilising growth was always the plan for 2022 before it was so firmly interrupted by Omicron and its subsequent variants. This can be juxtaposed against 2021 which was deemed a “window of opportunity” to address challenging structural imbalances created by the strong external demand environment; and the July 2022 statement that focused on Covid (“people first, life first”). This time growth is the focus.

Thus, the policy shift is now quite clear. Predictably, it came just as investors had started debating whether China was “uninvestable,” whatever that means.

What is the outlook for the coming year? There is obviously uncertainty about zero-Covid, about the property market, and the extent of the coming stimulus. The latter is, in part, a continuation of monetary and credit easing that has been ongoing all year. And, as in the West, reopening is unlikely to proceed in a straight line. As our experience shows, Covid waves are possible and perhaps likely. But just as the November vaccine discovery in 2020 was an important driver of the DM market rally, despite two subsequent Covid waves, so China’s decision to end the lockdowns and doubling down on economic stimulus could be key, whatever happens next.