China’s economic recovery is taking hold
2021 welcomes the year of the Ox, which is typically characterized by periods of recovery. The last times it happened was in 1997 and 2009 after the Asian Financial Crisis and the Global Financial Crisis, respectively. Following the recovery from the COVID pandemic, we believe that the strength of the rebound has this time given the Asian giant’s economic authorities the confidence to control stimuli and focus on their long-term goals. As outlined in the XIV Five-Year Plan, some of China’s key goals are:
Chart 1 – China remains focused on its long-term goals
Obtaining a sustainable and higher quality growth
Although the Chinese economy avoided a contraction in 2020 due to increased exports and investment in infrastructure and real estate, domestic consumption lagged behind. According to the Central Economic Work Conference (CEWC) 1, China will seek to encourage demand-side reforms to improve the purchasing power of the country’s lower and middle-class households. Some of the demand-side reforms include: optimization of the income distribution system, job creation, improvement of social security, tax regime, and payment transfers. Likewise, China’s domestic consumption in 2020 represented 54.3% of GDP and remains the cornerstone of structural economic operations2.
In June, retail sales growth eased to 12.1% year-on-year compared to 12.4% in May, due to the threat of variants. We remain of the view that the accumulation of excess wealth in the household sector should trigger a consumer-driven recovery as vaccines are updated with variants of COVID. China’s goals of quality growth have been achieved at the cost of a disciplined approach to injecting capital and withholding stimulus from money-losing and debt-ridden state-owned enterprises (EEs).
The slowdown in credit growth has been gradual and appears to be on track to meet the government’s objectives of keeping credit growth at the same rate as nominal GDP growth this year. On July 9, the People’s Bank of China reduced the reserve requirement ratio by 0.5% for most banks, in line with State Council guidelines, thus freeing up nearly 1 trillion yuan of long-term liquidity in the economy. These recent measures by the Chinese central should not be confused with a generalized easing stance as the entity continues on the path of a prudent monetary policy.
Source: Bloomberg, WisdomTree, with data available as of June 30, 2021. Past performance is not indicative of future performance and any investment may lose value.
Opening its economy and attracting foreign trade and investment
In June last year, the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOF) jointly issued two negative lists that include special administrative measures and specific administrative measures in the Free Zone (FTZ) for access to Foreign investment. The two negative lists refer to industries in which foreign investment will be prohibited or restricted. Compared to the 2019 negative list, the 2020 new national negative list has reduced the number of restrictive measures by 17.5% and the 2020 FTZ’s new negative list has reduced the measures by 18.9%.
The local currency bond market in mainland China has also increased fivefold from a decade ago. The ease and scalability of the Bond Connect program, launched in 2017, helped allay investor concerns regarding repatriation and capital account risk as assets were held and liquidated abroad. In November 2020, China integrated and relaxed the rating requirements for Qualified Foreign Institutional Investors (QFII) and Renminbi Rated Foreign Institutional Investors (RQFII), which has contributed to the popularity of these programs. China seems interested in promoting greater cross-border use of the renminbi.
Since their opening in 1991, the Chinese equity markets have grown at a rapid rate both in terms of market capitalization and the breadth of publicly traded companies. Today it is the second largest and most liquid stock market in the world based on a series of reforms that began in 2002. The inclusion of MSCI in 2019 has been a testament to how much China has made progress in its market reforms. capital market. We still believe there is a long way to go with only 20% market capitalization recognized so far, with an inclusion factor capped at 20% by MSCI.
Figure 3: Chinese reforms implemented since 2002
Source: WisdomTree, MSCI. Please note: the QFII and RQFII represent the Qualified Institutional Foreign Investor and Qualified Institutional Foreign Investor programs in RMB for the mainland China market. The Shanghai / Shenzhen Connect program enables foreign investors to trade listed securities on the Shanghai and Shenzhen stock exchanges directly through brokers in Hong Kong and connections to the Hong Kong Stock Exchange. The term CRSC refers to the China Securities Regulatory Commission. The Stock Connect program was initially launched in November 2014, with the opening of the Shanghai – Hong Kong Bridge. Under this program, investors in each trading floor can trade stocks from the other market using their local brokers and clearing agents.
Achieving climate goals
China has expressed a strong commitment to climate action. Being a large importer of traditional energy sources, we believe that China will continue climate action while meeting its long-term goal of becoming more self-sufficient. In keeping with what was agreed in the Paris climate pact, China has committed to achieving carbon neutrality by 2060 and reaching maximum emissions by 2025. In addition, the country is gradually shifting its energy mix from coal to cleaner energy sources. like solar and wind. Its goal is for renewable energy to represent more than 50% of its total electrical capacity by 2025, compared to 42% today. Likewise, China is far ahead of the pack in the global race towards electrification, evident from its development and deployment of electric vehicles and charging point infrastructure.
Graph 4: the share of renewable energies in the investment of new capacity 2020-2050E
Source: Bloomberg, WisdomTree, using data for December 30, 2020. Past performance is not indicative of future performance and any investment may lose value.
Opportunity in Chinese Class-A stocks
The variety of revisions to earnings estimates for Chinese Class-A stocks has started to show its first signs of stabilization. Corporate results continue to be a major driver of equity performance and we expect the incoming second quarter earnings season to be a major catalyst for Chinese Class-A stocks. Considering both favorable valuations and improving earnings reviews, the Class-A Chinese equity market presents a captivating investment opportunity for foreign investors looking to diversify their portfolios. Class-A Chinese stocks also offer a more balanced exposure to new economy sectors such as information technology, consumer discretionary, consumer staples and healthcare. In addition, we have observed that the S&P China 500 Index offers investors greater exposure to New Economy sectors compared to competing indices due to its greater exposure to Chinese Class-A stocks.
Chart 5: Comparison of New Economy Sectors in Indices
Sectors of the << new economy >>
S&P China 500
Source: Bloomberg, WisdomTree, with data for June 30, 2021. Please note that HSCEI represents the Hang Seng China Enterprises Index, while HSI represents the Hang Seng Index. Past performance is not indicative of future performance and any investment may lose value.
The S&P China 500 Index appears to provide comprehensive exposure to Chinese stocks without the concentration of risk present in the other indices. It also offers a much lower concentration in the financial sector compared to the FTSE A50 (37.37%), the Shanghai Shenzhen CSI 300 Index (23.6%) and the Hang Seng China Enterprises Index (28.34%) 3. The past performance of the S&P China 500 Index has been astonishing compared to other similar indexes, as shown below:
Graph 6: the historical comparison of the profitability of the Chinese selective
S&P China 500
Shanghai Shenzhen CSI 300
The negative perception regarding Chinese stocks, following recent concerns related to capital markets regulation and offshore stock listings, appears to be out of place. Beijing is tightening regulations on overseas listed Chinese companies and regulators around the world are seeking to crack down on the power that technology companies have acquired today. At the same time, we expect investors to moderate their growth expectations relative to technology companies, considering the increased scrutiny they face regardless of how profitable they continue to be. As China continues to emphasize its long-term goals and moves away from a carbon-intensive economy, it continues to offer fertile ground for potential investment opportunities.
The main economic agenda setting event for 2021
The Council of State; the People’s Republic of China
As of June 30, 2021