Gregory Peters, co-CIO at PGIM Fixed Income
China’s handling of its economic challenges has the potential to jostle global markets. The country’s property sector morphed from a slow-burning debt problem into a full-blown collapse last year.
China’s economic playbook of boosting flagging growth with rampant debt and leverage is approaching its sustainable limit. As China is caught in a classic debt trap, officials will be hard pressed to continue to fight debt with more debt. Ultimately, the economy will reach the limits of its credit expansion, as investment efficiency of the corporate sector will likely continue to deteriorate. This problem is especially acute when the overall economy is marred by repeated Covid lockdowns and energy shortages.
The big question is what a debt overhang will mean for China’s long-term growth potential at a time when the economy is already increasingly facing downward pressure and demographic challenges. We expect China’s growth to slow to about 4.5% this year, a far cry from the growth rates of 8% commonplace in the previous decade. To us, the era of China acting as the impetus for global economic growth is over, and the ramifications of slowing Chinese demand will present material risks for investors in 2022 and the decade to come.
Guy Monson, chief investment officer at Sarasin & Partners
China’s tilt away from the West intensified in 2021, with its greater assertiveness towards Taiwan, tighter security regime in Hong Kong and restrictive economic policies targeted at countries including Lithuania, Canada and Australia.
Domestic policy was also challenging. Regulators were antagonistic towards internet companies and education providers, while credit and leverage restrictions amplified already severe problems in the property sector. These policies contributed to a particularly sharp underperformance of Chinese equities, with the MSCI China index lagging the S&P500 equivalent by an extraordinary 50% last year.
More recently, though, there have been tentative signs of a policy reversal. The Chinese central bank has now loosened monetary conditions through a reduction in bank reserve requirements, while vowing, along with all government departments, to take ‘proactive’ moves to ensure ‘economic stability’ – we read this as short-hand for a limited bail-out of the property sector, more loosening of monetary policy and less heavy-handed regulatory intervention. In short, it is a policy mix that argues for better returns for China-centric markets in 2022 and potentially for the embattled technology sectors.
Jacob Mitchell, founder and chief investment officer at Antipodes Partners
As economic and regulatory fears cast a shadow over companies operating in the world’s second-largest economy, Chinese equities are now valued at ~35% discount to US equities – the largest valuation discount since the Asian crisis unfolded in the late nineties.
There is no question Chinese regulators have acted in a blunt fashion, but recent policies – particularly around anti-competitive behaviour and data security – are relatively rational and consistent with policies elsewhere in the world. Such actions include slowing credit growth to prevent the economy overheating, tightening the property sector – including hiking mortgage rates and deposits required for non-first-time home buyers – and regulatory reform targeting the education sector and internet companies to prevent anti-competitive behaviour. China has also introduced pollution and emission controls targeting peak carbon intensity in 2030 and carbon neutrality by 2060.
Policymakers in China appreciate that accelerating the transition to a consumption and services driven economy – and lifting the quality of economic growth – will require a vibrant private sector, and high-profile internet businesses are an essential part of this.
