2022 has witnessed significant market upheavals, with investors having to grapple with inflationary pressures, tightening financial conditions and geopolitical concerns. We shall zoom in to look closely at the Chinese economy as the Chinese equities markets had a major decline in the month of October.
After the recent sharp sell-off in China, we believe the markets are likely reflecting excessive pessimism. Credit growth posted a broad-based slowdown in October, likely reflecting weak demand, including lingering weakness in the housing market, and the Chinese government persistence stance on their zero-Covid policy.
From our perspective, China does not have an inflation problem. Bumpy growth and low inflation mean the central bank has the runway to continue easing policy, including tolerating a weaker trade-weighted CNY to support China’s export competitiveness and to boost domestic demand.
We continue to be optimistic on the Chinese financial markets with the views that the economy is at the tail-end of the economic downcycle and would be on a steady road to recovery for the following reasons:
Firstly, we are encouraged to see the Covid policy recalibration as it means more flexibility in handling outbreaks and less disruption to the economy. Actual implementation remains to be seen, given current severe situations in multiple cities like Guangzhou. In our view, the implementation of this policy is a move in the right direction towards improving economic activity.
Secondly, the People’s Bank of China (“PBOC”) and China Banking and Insurance Regulatory Commission (“CBIRC”) jointly announced a slew of measures to provide financial support to private corporates in an attempt to revive the property market. It includes 16 measures which aim to ease developers’ liquidity pressure by 1) supporting their refinancing, 2) allowing them to delay debt repayment, and 3) encouraging financial institutions (mainly banks) to lend more to developers. This is a big improvement compared to last few months piecemeal steps. We believe this should bring a halt to the property downward slide in the near term and alleviate a potential systemic pressure on the Chinese economy. In the meantime, we will monitor the homebuyer sentiment for any notable pickup in the real estate market. This takes time and the moment there are green shoots appearing, it should help in the improvement in the Chinese financial market.
Lastly, a highly unified government could lead to more effective policy execution and co-ordination in the midst of sluggish growth. President Xi Jinping secured his position as the leader of China in the 20th Party Congress, and have also appeared to keep his close allies firmly in place in the Politburo. In our opinion, this allows the current leadership to push forward economic policies strongly and more confidently.
On the other hand, we see the US economy and financial markets on a weakening trend in the medium term. The US Federal Reserve continues to be on a relentless trend in raising interest rate to tame inflation. It has delivered four consecutive increases of 0.75% this year with no sign of abating in the near term. The silver lining came from the latest collection of anecdotes from the Beige Book. It noted that inflation has eased somewhat and is expected to continue to ease further, an indication that the Federal Reserve aggressive monetary policy tightening may have started to take effect. However, this comes at the cost of slowing economic growth. 3Q earnings reporting season is currently underway with a fairly mixed set of corporate results. While consumption appears broadly resilient, especially in travel, pockets of cracks are appearing in the sales of goods. Results from mega-cap tech names have thus far been disappointing on the back of elevated expenses, currency headwinds, and cyclical advertising weakness.
In the US midterm elections, third party data suggest that a divided government is the most likely outcome. Consequences of a divided US Congress will mean a paralysis of domestic policies in the next two years, and we should not expect supportive policies to cushion the headwinds from tight monetary policy.
Meanwhile, the largest nations in the Group of Twenty (“G20”) were at odds with each other in the last several years. The G20 summit held in Jakarta recently, offered some hope that there is possibility of a thawing in relationships, especially between the US and China. We shall stay tune to future global developments.
In summary, we believe there is a decoupling in the global economy with the Asian economies at the tail-end of its decline with recovery in sight, and the developed economies still on the path of economic decline in the medium term. We continue to position ourselves with emphasis on the Asian economies and keeping an eye on the developments in the developed world.