Executive summary:
- China's economy has disappointed most expectations over the past year.
- China's need to rebalance from investment to consumption is coming when tensions with the U.S. are elevated. This could create continued volatility.
- We believe China does have the levers to alleviate some key challenges.
On Nov. 14, Jonathan Woo, Senior Research Analyst at Russell Investments, based in the UK, moderated an online discussion on what China’s economy means for institutional investors.
Joining Woo were Alexander Cousley, CFA, investment strategist with Russell Investments based in Sydney, Australia, and John Malloy, co-head of emerging and frontier Markets at Redwheel.
Following are some highlights of their conversation, which lasted about 40 minutes. Periodic timestamps and indications of visual slides are provided.
Woo introduced the panelists and explained that the conversation would focus on whether China’s growth prospects are still in track. In the recent past, Woo said, investors felt China would eventually succeed as the world’s largest super economy. Fast forward to today, he said, and the Chinese economy is beset by a property slump, a consumption slowdown and geopolitically sensitive trade issues in the wake of the Russia-Ukraine crisis
With that, Woo informed the audience that the webinar would include discussion about China’s economy and how it has disappointed most expectations for 2023. Further, he said, the discussion would touch on China’s need to rebalance from investment to consumption. The webinar would end with the panelists offering long-term outlooks on China.
Woo started off with a discussion on economic climate.
There’s been a downward trend for the Chinese stock market ever since the COVID-19 reopening at the end of 2020, roughly when vaccines started rolling off. Let's just take stock of the current setting. Share your thoughts on recent macro developments and data points to set the scene.
Cousley showed the slide, China desires to move away from to a capital-intensive economy to a consumption-led economy, and explained that it’s important to go back even earlier than COVID, when China was in the process of moving from a very capital-intensive economy to consumption. Despite some disruptions, Cousley added: “What we're really seeing now is that the government has been quite slow to enact policy stimulus, and we're really starting to hit more of an increasing drumbeat of that stimulus.”
Malloy also provided comments on China’s economy and how Redwheel has adjusted its portfolio.
In the near term, as we enter this period of slowdown, in recent times there has been a cocktail of exogenous factors that you have referred to with COVID and some stress points in real estate. With regard to the near-term picture, what do you see as the key challenge or opportunities?
“Consumer sentiment is very depressed right now,” Cousley said, and added that the youth unemployment rate is elevated, above 23%. “I think it's really important to note that these challenges were created—like their policy challenges that were created—so they can be fixed,” he said.
Further, while showing the slide, China retail sales, Cousley mentioned China’s ability to pivot quickly from being a construction economy to the world's leading EV (electric vehicle) exporter, adding that in the near-term, it should lead to a boost of consumer sentiment.
On the same topic, Malloy showed several slides while providing data points and commentary on the China property slowdown and growth opportunities in EV, e-commerce and digital platforms.
Timing is always difficult, so to help us understand whether or not now is the right opportunity, how do you think markets are trading, and what's sort of priced in, in terms of positives and negatives?
Cousley showed the slide, Chinese equities are priced for bad news, which highlights Russell Investments’ China vs. World contrarian indicator, and addressed a question about signs of panic potentially coming through. “That is going to provide the best opportunity from a beta perspective and a tactical perspective to start adding to Chinese equities,” he said.
“We know that panic can be a really strong indicator to go into markets. We saw that in COVID as a house. We brought a lot of equities and higher credit into that event,” Cousley said.
Moving along, Cousley discussed geopolitical influences and how his vantage point in Australia influences his perspective. “I think that we're seeing China just kind of come back to the table a little bit with not just Australia and Europe, but indeed also with U.S. business leaders, like Biden. I think de-escalating is a good way to put it,” he said.
From your vantage point, as somebody who spends a lot of time thinking about the long-term picture, is there anything you'd like to add? <26:13>
Sharing the slide, China and the middle-income trap, Cousley showed data that explains how China is on track to be like South Korea. “I think it's pretty clear that China is much more like South Korea than Brazil. The country has really moved up, especially in terms of high-tech sectors,” he said.
Also, regarding the question on whether China will overtake the U.S. to become the world's biggest economy, he said: “The more interesting question right now is just the catch-up in GDP per capita to South Korea, and that’s, to me, a far more interesting and important dynamic for markets than whether we see China overtake the U.S. on an aggregate basis.”
At this point, Woo shared the results to a poll question posed at the beginning of the webinar: “What are your key thoughts about China as an opportunity?” <36:56>
“In terms of the concern for China, primarily, it seems to be geopolitics, and about 30% of the respondents think the property market is an issue, and another 30% say demographics,” Woo said. “In terms of opportunities, it feels like half of the respondents think valuations are attractive. Half also believe that the growth prospects in the coming months are going to be positive and about 30% think stock selection opportunities are definitely something that appears interesting.”
The webinar concluded with Cousley’s final messages related to the property market and the state of the consumer <37:44>
“The property market is a challenge,” Cousley said. “But I think it's really important to remember this is a policy-induced problem in China government. They wanted to de-leverage the property market. They've done that, and I think focusing on what policy is doing now is really important. We’re seeing that inflection point from regulation and de-leveraging to more growth.
“I think the second thing is that the consumer is in decent shape. They're not optimistic right now, but they can turn very quickly, and I expect that if we see any sign of stabilization in the property market, particularly amongst the upper-tier cities, I think that's going to unlock some of those excess savings that [Malloy] showed before, because there's a lot of money sitting on Chinese household balance sheets ready to be spent and I think that consumer confidence, once that picks up, that's going to unlock a lot of that money.”
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