China's Loosening Cycle Could Lead To Opportunities

As we enter the Chinese Year of the Tiger, GAM Investments’ Jian Shi Cortesi discusses how China’s upcoming policy and governmental changes will set the stage for 2022.

11 February 2022

China was one of the worst performing markets last year; the MSCI China index was down 22%, underperforming US stocks by almost 50%. This sell-off was mainly driven by the fear of policy tightening. In past cycles within China, we have observed a period of policy loosening following a period of tightening. Consequently, we expect the policy environment to become much more supportive this year.

We can already see evidence that the government has started to loosen. The tightening last year has led to a deceleration in economic growth, with weaknesses in the property market as well as in overall consumption. At the China Central Economics Work Conference in December 2021, China’s policymakers mentioned pressure from shrinking demand, shocks in supply and weaker expectation. Covid-related measures and a cautious employment outlook continue to dampen consumption growth. At the same time, the liquidity crunch of some property developers has led to stress in the financial market and poses risks to the financial system. All of these have prompted the government to move to a more supportive policy stance. It can be argued that economic growth is the foundation of President Xi Jinping’s ‘common prosperity’ goal, as the economic pie needs to grow before it can be divided fairly among people. There is also an increased focus on the emerging Chinese middle class as part of that economic growth.

Monetary and fiscal stimulus

On the monetary side, China started cutting bank reserve requirement ratios late last year in order to boost lending to enterprises. The central bank deputy governor has pledged to use more monetary tools to support the economy and to drive credit expansion. More recently, the Chinese central bank cut interest rates by 10 basis points (bps), while also cutting the one-year loan prime rate (the benchmark lending rate) by another 10 bps. The government also encouraged the issuance of local government bonds to support infrastructure investments. We expect to see more reserve requirement ratio cuts and more lending rate cuts to come.

In terms of fiscal stimulus, premier Keqiang Li has asked to speed up the implementation of major engineering projects, which have been confirmed under the 14th Five Year Plan (2021-2025). The government is also discussing measures aimed at supporting consumption and driving domestic demand.

Supporting the property sector

The Chinese government is also reportedly planning to roll out new rules allowing developers to use escrow funds. This allowance will likely enable the completion of unfinished buildings, followed by prioritising onshore debt repayment, which should go some way to alleviating the liquidity crunch in the property sector.

After the correction last year, Chinese stocks now trade at attractive valuations, in our view. Compared to the MSCI World Index, the MSCI China Index trades at the lowest relative valuations, in terms of price-to-sales ratio, seen in the last 10 years. We believe this helps set the stage for the MSCI China Index to outperform going forward, in our view. As the policy moved into a loosening cycle, we are optimistic this will help investor sentiment recover and offer support to Chinese stock performance.

At the beginning of 2022, we see value opportunities in oversold consumer and technology names. We believe we are positioned to benefit from certain areas, in our view. One is rising star companies in innovation, as they appear to benefit from a more level playing field thanks to the anti-monopoly regulations. Another area are those sectors with strong policy support, such as renewable energy, semiconductors and technology advancement.