Refitting China’s broken growth engine Refitting China’s broken growth engine Refitting China’s broken growth engine

Refitting China’s broken growth engine

Redmond Wong

Chief China Strategist

Summary:  The moves of China to shore up its economy through the reopening from pandemic containment, support to the real estate sector, ending of the crackdown on the internet platform companies, and attempts to thaw relations with key trading partners are in a positive confluence of an upturn in the credit impulse cycle. The combined impacts tend to support further rallies in Chinese equities in Q1 and lend support to global commodities and growth.


The Chinese growth locomotive is battered

As discussed in our Q3 and Q4 outlooks last year, China has been in the transformation to a new economic development paradigm, walking away from its labour-intensive, energy-intensive and export-oriented model that had been the backbone of the development of the Chinese economy in the prior decades to focus on high value-added industries, self-reliance and comprehensive national power.

The terrain on which the transformation travels is rough. Transforming an economy with a declining working-age population, and with a workforce that is largely unskilled and from rural areas, is a daunting task. The surge in volatility in global energy prices and an increasingly hostile external environment driven by concerns about supply chains and geopolitical tension are additional hurdles. The crackdown on the real estate sector, the mega-cap internet platform companies, and the tycoons and vested interests behind both sectors to steer economic development to a new path, pursue the course of common prosperity, and claw back economic power have added further challenges on keeping the growth engine even moving forward.

In Q4, China hit the gigantic pothole of the surge of the highly infective Omicron variant of Covid-19, which completely upended the pandemic containment model that had once been touted to symbolise the superiority of socialist China’s way of governance. The skyrocketing fiscal burdens of implementing quarantines and costs of tens of billions of PCR tests and the general disruption of economic activities and land sale revenues brought local governments to a fiscal cliff. Discontent first bubbled up on social media and eventually saw citizens taking to the street briefly in November of last year.

Fixing the economic engine becoming the priority

With economic growth grinding to a halt, refitting and reviving the economic engine brought a quick about-face in policies. On 11 November 2022, the Chinese health authorities relaxed guidelines for the country’s pandemic containment measures, with a series of further relaxations and the subsequent abandonment of the dynamic zero-Covid policy in December 2022. On 13 November last year, the People’s Bank of China and the Banking and Insurance Regulatory Commission jointly issued 16 measures to improve private property developers’ access to funding and opened the gate for a number of other additional policies to help shore up the balance sheets of property developers. 

At the Chinese Communist Party’s Central Economic Conference held on 15 and 16 December 2022, the Chinese leadership sent out a clear signal of shifting to a conciliatory stance towards the private sector and pledged to support internet platform companies without mentioning preventing the disorderly expansion of capital which haunted internet platform companies since 2020.

On 26 December 2022, the Chinese authorities announced a downshift of the handling of Covid-19 infections to category-B, the same as avian flu, hepatitis, tuberculosis and so on, and a lifting of border restrictions starting from 8 January 2023. On 9 January, Guo Shuqing, China’s top financial regulator, said that the campaign to rectify the 14 mega-cap internet platform companies’ financial business arms was basically completed. 

In short, over the past two months, China has taken a U-turn in policies regarding Covid-19, the property sector and internet platform economy as it tries to fix the economy. The magnitude and pace of the shifts have far exceeded the expectations of many investors who were expecting a more gradualist approach and ‘opening up’ timing closer to March 2023 or later. 

Facing down geopolitical hazards

Besides the domestically oriented policy measures, China has shown tentative signs of becoming more conciliatory toward the United States and its allies after a sense of escalating confrontation. When they were in Bali, Indonesia for the G20 Summit in late November, China’s President Xi and US President Biden held a three-hour long meeting, with both leaders showing some goodwill gestures. 

Further gestures towards the US were later deliberately expressed by the newly appointed minister of foreign affairs, Qin Gang, in an article in the Washington Post. Qin Gang turned up the charm and affectionately recollected his days as ambassador to the US, praising Americans as “broad-minded, friendly and hard-working” and saying that the “future of the entire planet depends on a healthy and stable China-U.S. relationship”. 

Another move to thaw tensions was China’s invitation of Australia’s foreign minister to visit in December last year. China subsequently placed an order to import Australian coal for the first time in more than two years after it imposed an unofficial ban on Australian coal in 2020. 

The confluence of the policy cycle and credit cycle amplifies the reacceleration potential

These substantial policy shifts were rolled out rapidly in a matter of two months and clearly demonstrated the Chinese determination to adjust the direction of the new development paradigm from 2020 and dig the economy out of the Covid-19 containment pothole. We believe that China’s drive to structurally transform its economy into a new economic paradigm remains intact. The recent policy shifts are to fix the economy as if in a cyclical downturn. In spite of the short-termism potentially embedded in the policy shifts, they are in the confluence of an upturn in China’s credit cycle and can produce powerful impacts on the Chinese economy and its equity market.

China’s credit impulse is an index that measures the flow of new credit as a percentage of GDP and its 12-month rate of change tends to lead the turn in the real economy by 10 to 12 months. In Figure 1, we plot the year-over-year percentage change of the Bloomberg China Credit Impulse Index 11 months forward against China’s Manufacturing Purchasing Manager Index. The Credit Impulse has bottomed and turned to trend upward since Q4 last year and points to expansion through most of 2023. 

 
Source: Saxo Markets; Bloomberg LP.

Moving from infrastructure to technology and consumption stocks in Q1

Investors are rightly looking through the initial shockwave of Covid-19 infection across the country in December and into the start of this year to the subsequent reacceleration of economic activities and credit expansion. The investment case for Chinese stocks in Q1 is strong.

Last year, we preferred resorting to the infrastructure space for its benefits from the counter-cyclical policy tailwinds as the Chinese government was pouring money in that direction. For 2023, as the Chinese economy is moving into a cyclical upturn, we believe cyclical growth stocks, including technology and domestic consumption names, will outperform. Leading internet platform companies such as Alibaba, Tencent, JD.COM and Pindoudou, and consumer discretionary names China Tourism Group Duty Free, CR Beer, Jiumaojiu, Li Ning and many others, may offer interesting investment opportunities. 

Spill-overs to global commodity markets and growth

The reacceleration in economic growth in China may spill over to push up commodity prices globally, especially those of industrial metals and energy, as well as contribute to global industrial production and GDP growth. As an excellent paper from Fed researchers concludes, “what happens in China does not stay in China”.

Disclaimer

The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.