The China Briefing
Is the rally sustainable this time?
Please find below our latest thoughts on China:
- It has been a proverbial rollercoaster ride for China equities in the last few weeks
- First there was the reaction to the Party Congress with offshore markets in particular experiencing a ‘reality check’ in response to the consolidation of power and the message of policy continuity.
- The weakness didn’t last long, however, as markets subsequently rallied sharply on the first glimmers of light at the end of the dark Covid tunnel, and additional support for the property sector.
- The question now is whether this recent rally is sustainable or if it is another false start like we saw in Q2 after the easing of the Shanghai lockdowns.
- One clear takeaway from the market reaction is that, cutting through all the noise on China (geopolitics, Taiwan, US tech sanctions etc), it is weakness in the domestic economy which has been weighing most heavily on markets.
- And therefore, the answer to the question on market outlook lies in whether policy changes will feed through into actual improvements in the real economy.
Chart 1: MSCI China A Onshore and MSCI China performance since Party Congress
- Our view is to expect that 2023 will see improvement in economic momentum (most likely in contrast to much of the rest of the world) and also corporate earnings. But growth will not be on a steady footing until the Covid situation stabilizes.
- And the road to reopening in China is likely to be bumpy – as demonstrated by recent events.
- Earlier this month, the central government published “20 measures” to optimise Covid containment policies, aimed at reducing the burden on local governments and the economy.
- However, this high-profile policy relaxation – which triggered the market rally – meant that local governments no longer tried to stamp out the localized Covid outbreaks in the same way as before.
- The number of reported Covid cases had already been on the rise, and as a result of the policy relaxation they now running at the highest levels since the Shanghai lockdowns.1
Chart 2: Daily new Covid-19 cases in Mainland China
- The initial response by the central government has been to send signals that it still wants to continue the containment strategy. Beijing, Shanghai and Guangzhou have all reintroduced controls.
- The government’s aim has been for a controlled reopening with one of the initial priorities being to change the narrative around Covid, with a large proportion of the population still fearful of high mortality rates.
- Only recently, images flooded social media of an exodus of hundreds of workers from the huge Foxconn compound, Apple’s biggest iPhone manufacturing facility in China. Covid had been detected in the walled campus which consists of around ten densely populated square kilometers housing nearly 350,000 people.2
- At some stage, China will need to move to a de facto policy of tolerating Covid like the rest of the world, which should be positive for the economy and for equity markets. Indeed the clear signal from the “20 measures” was that China is preparing its exit strategy. In practice, however, the path to getting there is still unclear.
- The other key issue depressing economic activity relates to property. Here the recent policy action – in this case “16 measures” co-ordinated by the PBOC and CBRIC (the banking and insurance regulator) – seems more decisive.
- The measures included banks extending maturing loans to developers and providing additional funding to ensure completions of pre-sold homes (which account for around 90% of total activity in the housing market).3 At worst the outcome should be a further reduction of a property hard landing tail risk.
- Another fillip to markets recently has been a respite in US-China strategic rivalry. As Churchill once remarked, ‘jaw-jaw is better than war-war’.
- With both Presidents Biden and Xi bolstered by recent domestic political events, their meeting at the G20 summit – described by China’s foreign minister as ‘auguring a new starting point’ for the two countries – suggests the downward spiral of US-China relations has paused, at least for the time being.
- In this area, there is expected to be an announcement soon by US regulators regarding the onsite audit inspections of China ADRs. The audit inspectors finished their work in Hong Kong earlier this month, ahead of expectations. A positive outcome would help to reduce the risk of China ADRs being forced to delist from US markets.
- In summary, we see recent events as increasing the likelihood of a more positive scenario for the new year. The renewed focus on pro-growth economic policies so soon after the Party Congress is no coincidence. And as this eventually translates into a more sustainable economic upturn, we expect market confidence to also recover.
1 Source: Wind, 22 November 2022
2 Source: Nomura, 21 November 2022
3 Source: Gavekal, 27 July 2022
Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Foreign markets may be more volatile, less liquid, less transparent, and subject to less oversight, and values may fluctuate with currency exchange rates; these risks may be greater in emerging markets. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.
The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.
This material has not been reviewed by any regulatory authorities. In mainland China, it is for Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations and is for information purpose only. This document does not constitute a public offer by virtue of Act Number 26.831 of the Argentine Republic and General Resolution No. 622/2013 of the NSC. This communication's sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of his document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced. This communication 4 does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru, and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional/professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.
This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors Distributors LLC, distributor registered with FINRA, is affiliated with Allianz Global Investors U.S. LLC; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; in HK, by Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; ; in Singapore, by Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; in Japan, by Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424], Member of Japan Investment Advisers Association, the Investment Trust Association, Japan and Type II Financial Instruments Firms Association; in Taiwan, by Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan; and in Indonesia, by PT. Allianz Global Investors Asset Management Indonesia licensed by Indonesia Financial Services Authority (OJK)