The Year of the Tiger – will China’s markets roar or whimper?

The Year of the Tiger – will China’s markets roar or whimper?

Domestic factors held China’s markets back in 2021 as developed equity markets soared. However, developed economies now face headwinds, most notably from inflation. By contrast, China does not share these issues, and its domestic agenda has switched to supporting growth. This swap-round creates a great opportunity for active managers in China in the Year of the Tiger. We have therefore added our first dedicated China fund to our overweight exposure to Asian markets (excluding Japan).

The setbacks of 2021 clearly set out the risks of investing in China

As a whole, Asia made modest gains in 2021, although it underperformed the global equity market. The main drag was China, which lost ground largely as a consequence of domestic issues.

  • China undertook a regulatory clamp-down on a range of companies and industries, most notably in technology and education. These measures were very disruptive, with companies and industries losing billions in revenues and market capitalisation overnight.
  • There was a default by the massive Chinese property company Evergrande. This highlighted the extent of the problems in the key property sector, which accounts for 30% of GDP.
  • The sustainability of China’s ‘zero-Covid’ policy and, by extension, its ability to maintain its economic recovery were threatened by new variants of Covid-19. Both Delta and Omicron are not only more infectious but also highly resistant to China’s two domestically manufactured vaccines.

After the setbacks of 2021, the risks of investing in China are clear; but so is the opportunity for active managers in this Year of the Tiger.

The Chinese economy took repeated hits from these government policies in 2021, but we are seeing a clear shift by the government towards supporting growth in 2022. However, we do expect the new regulatory approach to persist, and companies, industries and investors have had to adjust their expectations accordingly. Areas most at risk from further regulatory intervention appear to be online gaming and monopolies in other new areas of the economy enabled by technology.

China’s government has switched to supporting economic growth in 2022

China’s government has clearly stated that it intends to support economic growth in 2022. Economic growth is required to ease the pain of managing the fallout in the property sector following the bankruptcy of Evergrande. A growing economy is also imperative for the policy objective of spreading the benefits of that growth throughout society. And a positive economic backdrop is important for the 20th Party Congress in the autumn, which sets the government’s path for the next five years.

Risks remain, not least the new variants of Covid. But in this regard, it is clear that the Chinese government has the capacity to enforce zero-tolerance policies until better options become available. We therefore expect the government to bolster economic growth in 2022 through both fiscal and monetary policy.

We see opportunity for active management in China in the Year of the Tiger

We had great success with our active equity managers in Asia (excluding Japan) in 2021. Asia remains a key overweight in our portfolios, although we are cautiously positioned on equities overall.

For 2022, we have added our first dedicated China fund. The T Rowe Price China Evolution Fund invests both directly and via Hong Kong and other listings. It focuses on companies with market caps below US$30bn, which means that it essentially excludes the index’s the top 100 stocks by market cap. This should help avoid those individual companies most at risk from regulatory clampdowns. The managers divide their portfolio into three buckets: compounders, special situations and non-linear growers.

After the setbacks of 2021 the risks of investing in China are clear; but so is the opportunity for active managers in this Year of the Tiger.
23 February 2022
Scott Spencer
Scott Spencer
Investment Manager
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Risk Disclaimer

The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.

Views and opinions expressed by individual authors do not necessarily represent those of Columbia Threadneedle Investments.

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