Having both spent their formative years in China, GAM Investments’ Jian Shi Cortesi, Investment Director, Asia / China Growth Equities and Amy Kam, Investment Manager, Credit Fixed Income, share a unique understanding of Chinese culture and markets. Both investment specialists discuss their respective views on China in 2021 and the impact of the pandemic on China’s role as a global economic powerhouse.
Macro view: China’s response to the pandemic and how the ‘stars have aligned’
Facts speak for themselves when it comes to the Covid-19 pandemic. For China, culturally, a top-down model works better for dealing with a virus, Amy explains. From the moment the first cases of Covid-19 were identified in Wuhan, in December 2019, China initiated rigorous public health measures, such as lockdowns and widespread testing. As of 2 February 2021, the country had seen just over 100,000 cases and 4,818 deaths, according to figures from Johns Hopkins University in the US. Aside from a few flare ups, China’s daily caseload has rarely passed a few dozen since 7 March last year, with many of those cases relating to individuals returning from Covid-19 hotspots elsewhere in the world. Jian adds that China and other Asian emerging markets (EM) had dealt with pandemics before, which meant they were better prepared, and the subsequent economic impact was less severe.
“From a GDP perspective, China (and north Asia in general) has actually benefited structurally from the pandemic,” Amy adds. “Previously, there has been a perpetual struggle of trying to escape the ‘middle-income trap’ for EM economies. But the industrialisation of China has meant that technology was already in the right place for growth; there was a push for technology-driven innovation to move up the value chain. The pandemic accelerated this and put technology at the forefront. In turn, this aided in dealing with the Asian debt demographics.”
With this, ecommerce is a tremendous part of China’s success story. As a result of Covid-19, ecommerce now forms a significant part of how consumers interact with goods and products. The US has been the champion of commerce for centuries, but increasingly, China is becoming the centre of innovation for ecommerce – its ecommerce market is larger than the US and European markets combined.
Alongside the successes of China’s response to the pandemic and its structural make up, the rapidly growing Chinese middle class is also key, as Jian explains. “The rise of the Chinese middle class is something that cannot be ignored. In equities, everything we do is centred around the activity of Chinese middle-class consumers. This demographic is a driver for the entirety of EMs; it drives tourism, production and technology across the east. Outside of Asia, the growth of the Chinese middle class also drives many sectors, a prime example being European luxury goods.”
China’s middle class and ageing population are essential for fixed income too, in Amy’s view. “It means the fixed income asset class is very well supported. While it is different from equity, with time the growing middle-income population could present potential for opportunities. It means increased demand for fixed income as wealth rises.”
The global drive for sustainability should also help drive China’s growth in 2021 and beyond, according to Jian. “China is a global leader in solar, wind power, battery production, there is a massive clean energy drive,” says Jian. “As the world moves to clean energy, China will likely benefit as the primary supplier of the core products to create this clean energy. China’s electric vehicle (EV) technology is developing rapidly; the country is set to benefit from the move to a greener world.”
Amy notes China is committed to a more sustainable world. “Last year China committed to a net-zero pledge of carbon dioxide emissions by 2060. This will mean the rechannelling of between USD 1.6 and 2 trillion of investment per year. This is extraordinarily bold and proactive of China and I believe joining the US camp is a wise move. US president Joe Biden has cut USD 40 billion worth of subsidies for fossil fuels, a large step in achieving cost parity for all aspects. China was driving circa 80% of the solar panel demand in recent years and while this has now reduced to around 50%, this makes the demand side more diversified and could provide greater earnings stability for companies in the sector. China is an enormous country. Its net-zero emission pledge brings economies of scale, which should help drive global efforts in achieving the common goal of capping global warming by driving cost parity in fleet electrification, carbon capture and hydrogen development.”
China is putting an increasing amount of effort into opening its financial markets, for example, Belgium-based financial services company Euroclear and Shanghai Clearing House joined forces in December 2020 to create the Yulan bond programme. The partnership increases Europe’s commitment to further developing financial markets in Asia and moving them up the value chain. The fact this programme has been formed outside the US is significant, as it offers European investors exposure to the fast-growing Chinese fixed income market while Chinese companies have additional and diversified funding channels.
China remains underrepresented in global indices, both in equities and fixed income, according to Amy and Jian. Amy says global decision makers are moving to address this because China is simply too big to ignore. “If you look at the International Monetary Fund (IMF) economic forecasts, the country’s GDP was forecast to overtake the US in 2030. This has now been revised to 2028. Growth for China is important, and from a bond index point of view it will need to be represented.” Indices are increasing their exposure to Chinese equity by including China, which should increase the focus on Asia as a whole, potentially leading to more inflows into the region.
What stands in China’s way?
With the current outlook for China looking positive, what could hinder growth? With regards to the US and China situation, little has changed of late. “The trade tensions are only one aspect of the rivalry and this rivalry is not going to dissipate,” says Amy. “What could be interesting is Joe Biden’s play for a green structure, such as his move to make the US part of the Paris Agreement once again. As noted by many western observers, I believe that Xi Jinping’s (the Chinese president) genuine desire to drive sustainability is the only and most efficient way for China to transition from investment-led growth to consumption-led growth amid its ageing population. I believe there is great scope for China and the US to work together; the desire for a greener world gives many countries a common goal to work towards. Global collaborations are becoming increasingly important. We have seen the ground-breaking signing of EU-China Comprehensive Agreement on Investment (CAI) setting the path for future collaborations between China and Europe. This form of agreement is unprecedented for China and indicates a strong desire for global cooperation in meeting common goals, suggesting the US could be next.1 However, we can only speculate on exactly what is to come.” Jian expects the US-China rivalry to continue and adds: “As the traditional Chinese saying goes, on one mountain, you cannot have two tigers. I expect to see more discord, as we have seen previously with the banning of TikTok and Alibaba. Neither the Republicans nor the Democrats see China as a friend.”
One hurdle to be overcome globally in 2021 is the potential impact of a failed vaccination programme or any significant resurgence of the virus. Neither Amy nor Jian believe such events would pose much risk to China’s growth given the country’s robust approach to the pandemic in 2020. Despite the negative global backdrop, China still achieved 6.5% growth over the course of the year.
While the timescale is uncertain, China’s exponential growth suggests it could be moving towards some form of global dominance. “I am very positive, although I am somewhat biased given my background and the fact that I am a direct beneficiary of China’s growth,” says Jian. “However, the point remains, China is the second-biggest economy in the world and in my view no investor can afford to ignore it. Even when you are investing in any other part of the world, it is crucial to be aware of China, due to its global impact. There are now more Chinese companies in the Fortune 500 than US companies.”
Amy’s outlook is also constructive. “While the US-China decoupling may persist and the rate of growth for China depends on how many challenges are presented, I believe China’s growth is inevitable. China is doing all the right things, in my view. I understand various concerns, however, the China-led recovery from the pandemic means I have a positive economic outlook for the entire region. China’s significance consists of not only the role it plays as a rapidly growing major trading partner for the region, but also the significance of it being a major source of capital.”
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. There is no guarantee forward-looking statements will be realised.