Chinese markets experienced considerable turbulence in 2021, as sweeping regulatory crackdowns and the Evergrande crisis weighed heavily on investor sentiment.
As the Year of the Tiger begins, and the eyes of the planet turn to China for the Beijing Winter Olympics, political and regulatory uncertainty still surrounds the world’s second-largest economy – which continues to face stringent Covid-related restrictions.
Despite the ongoing pessimism, nine investors discuss whether a roaring recovery is on the cards for the world’s engine of growth over the next 12 months and beyond.
Wenli Zheng, portfolio manager of the T. Rowe Price China Evolution Equity Fund
Policy has been on top of investor minds in China, which has had a meaningful impact on several industries. While some policies caught investors by surprise, we think the government’s intention has been clear and consistent.
Take the policies on property, healthcare, and education, for example. The overarching goal is to build a more sustainable and equitable society. On the other hand, the regulations on online platforms aim to create an open, more competitive ecosystem, instead of ‘walled gardens’. There are cyclicality elements to China’s regulatory environment, as the idea is to ‘fix the roof on sunny days’. China’s regulators tend to carry out structural reforms when the economic situation is favourable, rather than weak. We believe the recent countercyclical policy moves can help China’s economy become more resilient against future external shocks.
We see mispricing opportunities created by the recent regulatory concerns. With investors shying away from anything related to the property and healthcare sectors, we believe there are companies with unique business models able to navigate the environment successfully. For example, this includes select companies in property management services, furniture retail, and medical devices.
Pierre-Henri Cloarec, portfolio manager of Nordea’s Emerging Stars Equity strategy
Despite a challenging 2021, we are witnessing signs of optimism as China enters the Year of the Tiger. While China’s widespread policy tightening has undeniably affected investor confidence, we believe the government remains committed to supporting the private sector – which accounts for about 80% of the country’s employment and trade. Nevertheless, the regulatory changes need to be analysed on a case-by-case basis, as the impact on individual companies and industries differs.
As is traditionally the case ahead of the Chinese Communist Party Congress – with the next one set for November – the focus of the authorities is set to return to economic growth. China is expected to be one of the very few major economies to engage in policy easing in 2022, at a time when the US will start tightening.
In sum, even though volatility may persist in the short term, we believe the current depressed sentiment towards the Chinese equity market – reflected in the large valuation discount relative to developed markets – is unwarranted.