Was last week’s intervention by Chinese vice premier Liu He his ‘whatever it takes’ moment, the Asian equivalent of Mario Draghi’s unambiguous support for the Euro ten years ago? Investors certainly thought so. In a tumultuous week, Chinese shares delivered, first, their worst day and then their best in a decade.
The market’s abrupt U-turn came after a speech from China’s most powerful economic voice. Investors rightly interpreted Liu’s words as a significant pivot in Chinese policy back towards economic growth and stable financial markets. After a desperate year for investors in China, the sigh of relief in Shanghai and Shenzhen could be heard around the world.
If you had invested $100 in the S&P 500 two years ago at the bottom of the pandemic plunge, it would be worth nearly $200 today, even after the recent interest rate and Ukraine-related correction. The same amount invested in the main Chinese benchmark index, the CSI 300, would be worth less than $120. The idea that China was first into, and would be first out of, Covid did not survive long into 2021 and the country has been a grim investment destination for more than a year now.
It’s not hard to see why investors should have shied away from China. There has been a cocktail of worries and, in the context of a global recovery from the pandemic and rising markets elsewhere, China has been easy to ignore. The question now is whether the tide has turned. In the wake of Liu’s comments last week, a more positive gloss can be put on all the main concerns that have held investors back.
The first piece of good news in Liu’s speech was his unambiguous statement of intent about stimulating the Chinese economy. China had already entered 2022 in easing mode, but it was made explicit last week that monetary policy should take the initiative - the mirror image of the tightening policy that was coincidentally kicked off by the Federal Reserve in Washington on the same day. We can expect interest rate cuts, a reduction in reserve requirements for banks and more fiscal stimulus to emerge in the weeks ahead.
The second positive in Liu’s speech was his apparent recognition that the ad hoc regulatory squeeze that has accompanied Beijing’s ‘common prosperity’ drive has gone far enough. What’s been called China’s Whack-a-Mole approach to picking off individual sectors that it considers not to be acting in the public interest looks like it will become more transparent and predictable from now on.
The third bit of good news to emerge in the speech was confirmation that regulators in both China and the US are working to defuse the threat to delist Chinese companies traded on US exchanges that don’t or can’t comply with stringent US accounting rules. Although this is a long-standing bone of contention that dates back to the Trump presidency, it was the naming of the first five potential delistings that was an important trigger for the big sell-off in Chinese stocks early last week.
With almost all of the more than 200 Chinese companies impacted by the rules already having a Hong Kong listing as well, it is questionable how real an issue this is anyway. But no-one can deny the negative influence it has had on already battered sentiment. Coming to an accommodation with the Americans would certainly improve the mood.
The fourth positive news to emerge this week surrounds China’s approach to Covid, which looked strong in the early days of the pandemic but increasingly rigid and economically damaging now that the rest of the world is learning to live with the virus. Easing travel and quarantine restrictions in Hong Kong provide some hope that the short lockdowns in Shenzhen and elsewhere are not necessarily the start of more widespread restrictions.
With more than 80pc of China’s population now vaccinated, the country is moving towards the same sort of herd immunity that is protecting the rest of us. That is obviously good news for China but has important knock-on implications for supply chains the world over.
The big unknown regarding China at the moment is clearly its stance vis a vis the war in Ukraine, but here too the evidence we do have is reassuring. China’s comments so far would appear to respect Ukraine’s territorial integrity and to suggest its desire to remain a neutral observer of the conflict. The fact that President Xi is talking to his US counterpart is encouraging.
Obviously, anything which avoids the imposition of sanctions or other measures on China is desirable. China is significantly more integrated into the global economy than Russia. Its share of global GDP is six times greater than Russia’s. And its dominance in trade, in both directions, is also massively higher. No-one wants to go down that path.
Be fearful when others are greedy and greedy only when others are fearful, Warren Buffett famously advised. Well, there can be few investable markets around the world where there has been such a long list of things to be fearful about than China. There are clearly plenty of risks still, but there always are when the best investment opportunities come along.
To look at China again, you have to be willing to believe we are past the worst in terms of regulation, Covid, market liquidity and geo-political risk. If you can do that then you will find an economy that’s being stimulated when others are being squeezed, earnings that are still growing and a market that is relatively cheap. At the very least you know that Beijing is on your side again.
Tom Stevenson is an investment director at Fidelity International. The views are his own. He tweets at @tomstevenson63.