Is the worst now over for China?

Oksana Patron

16 September 2022

Although China has been left behind in regaining its momentum this year and a lot of volatility is expected in China equity market, there are at least four reasons to believe that the worst is over, according to Robeco.

This included the condition of the Chinese banking system, which was well-buffered and able to absorb the shock without presenting systemic risks, such as the property market slump, the less restrictive Covid-control measures going forward, government targets economic stimulus and the regulatory action against China’s ‘platform economy’ having come to an end.

According to Robeco’s head of investments, Jie Lu, despite the recent property market slump and financial struggles of developers, the central government aimed to continue to encourage local governments to find solutions to ensure developers could complete unfinished projects.

However, this might not be enough to reverse the trend of declining home sales and property investment, Liu believed that the central government would ultimately step in with targeted policy support.

On top of this, the government targeted economic stimulus was expected to support the construction sector.

“Unlike in the post-2008 period, the current program is limited in scope, but will still materially support economic growth. An extra US$146 billion package was announced on 25 August 2022, designed to support both investment and consumption,” Liu said.

Also, a resurgence in infrastructure spending through new provision for local government loans and new project approvals would help kickstart construction activity, which had slumped during the pandemic.

On top of this, Liu noted that the regulatory action was winding down, in particular action against China’s ‘platform economy’ that depressed tech valuations had run its course.

Following this, there was a change in rhetoric to help sentiment in the sector as China’s leaders signalled they would give the green light to a raft of tech deals and also indicated the technology sector’s important role in boosting the country’s economy.

Finally, the Covid situation stabilised with ‘Dynamic Zero Covid Control’ the policy until the year-end, with measures likely to be less restrictive over time, especially if the policy is reset at the next party congress in October 2022.

“Taking into account these four factors means the outlook for China is now more positive and predictable than it has been since the Covid era dawned in early 2020,” Liu noted.

“The China A-share market typically exhibits a low correlation with global equity markets and as monetary policy has decoupled from the trajectory of the US and Europe, seeking exposure to China now makes even more sense from a diversification perspective.”