THIS MATERIAL IS A MARKETING COMMUNICATION.
China Sector Leader Review and Outlook 2022
As we see off 2021, many will remember it as the year of regulation. Chinese policymakers normalised monetary and fiscal policies and tightened regulatory measures across a number of sectors, igniting a push towards common prosperity to address the chronic income inequality brought on by decades of astronomical economic growth. As policymakers committed to a balancing act between security, supply-chain self-sufficiency and social equality, geopolitical tensions caused significant market volatility.
What’s Next After a Year of Regulation?
It was a roller-coaster ride for equity markets. Issuances for domestic mutual funds reached new highs, kicking off a broad-based market rally before the Chinese New Year. Economic recovery continued into the second quarter of 2021, with second-quarter gross domestic product year-on-year growth reaching 18.3%. 1
However, a series of new regulatory requirements for data, fintech, carbon emissions, after-school tutoring and property interrupted the Chinese economy and led to a significant underperformance in the MSCI China over the course of the year.
A combination of property tightening and a resurgence in COVID-19 triggered a slowdown in retail sales, while power shortages dragged on GDP growth to below 5% in the second half of 2021.2 Markets started to stabilise as policymakers started to ease up on directives in the fourth quarter of 2021. Yet this was short lived as de-listing concerns re-emerged in December, causing a significant drop in Chinese American depositary receipts (ADRs)—negotiable certificates issued by a US depositary bank representing a foreign company’s stock—across industries.
Valuations Remain Attractive
The MSCI China Index de-rated and lost over 15% year to date, significantly underperforming global equities.3 As a result, Chinese equities are considerably more attractive from a price/earnings-to-growth and price-to-book perspective from a historical range, especially considering that new economy companies now account for a bigger portion of the index.
Despite a whirlwind 2021, the intensity of the regulatory crackdowns is likely to moderate. As the Chinese government pivots towards a cross-cyclical policy framework, we’d expect adjustments to be much more subtle in the new year.
Market Outlook: China’s Balancing Act Between Growth and Sustainability
China has clearly prioritized social objectives over economic growth. Yet a slowdown in growth has hit levels policymakers can no longer ignore. The Chinese Communist Party’s 20th National Party Congress in the fourth quarter of 2022 should see changes within the top levels of the Politburo Standing Committee. That said, stability will be key to ensure a smooth transition.
Looking ahead, the Chinese government will have to play a balancing act between growth and sustainability, targeting a 5% gross domestic product (GDP) growth target for 2022, in our view/we expect. The Chinese government’s shift towards a cross-cyclical policy framework, while sparse in details, aims to pre-emptively smooth out any fluctuations in growth through smaller policy adjustments. This is a pivot away from the country’s long-preferred counter-cyclical policy used to stimulate the economy.
Under the government’s new policy framework, housing will no longer be a preferred counter-cyclical tool to stimulate the economy. However, we do not expect any further over-tightening or systematic risk either. The gap between producer price index (PPI) and consumer price index (CPI) is expected to narrow—PPI is likely to peak off while CPI may pick up in in the second half of 2022. While infrastructure investment is likely to accelerate to partly offset the potential moderation on exports as global supply chain to gradually normalize as COVID-19 gradually fades out. Yet, property policy will likely be the biggest uncertainty factor for growth in 2022.
With a moderate growth environment we expect secular growth sectors to see a boost from policy tailwinds that favour clean energy related businesses. In spite of the regulatory crackdowns we saw in 2021, the intensity should moderate and is unlikely to alter China’s long-term policy goals. As a result, regulatory action affecting China’s internet and property firms are likely here to stay as the country transitions into the implementation phase of its regulatory schedule. While ongoing delisting concerns have impacted investor sentiment and valuations, this should have been mostly digested in 2021 and should have limited impact on company fundamentals as we head into the new year.
That said, a zero-tolerance COVID-19 policy and a resurgence in the new variant places the biggest uncertainty for the retail and services industry. Geopolitical risk is another known unknown—we saw some improvement in the Sino-US relationship over the year, but whether both sides can make substantial progress in trade and roll back tariffs remains to be seen.
Staying Ahead with Mirae Asset’s Latest Insights
1. Source: National Bureau of Statistics of China, July 2021.
2. Source: National Bureau of Statistics of China, January 2022.
3. Source: Bloomberg, December 2021.
Disclaimer & Information for Investors
No distribution, solicitation or advice: This document is provided for information and illustrative purposes and is intended for your use only. It is not a solicitation, offer or recommendation to buy or sell any security or other financial instrument. The information contained in this document has been provided as a general market commentary only and does not constitute any form of regulated financial advice, legal, tax or other regulated service.
The views and information discussed or referred in this document are as of the date of publication. Certain of the statements contained in this document are statements of future expectations and other forward-looking statements. Views, opinions and estimates may change without notice and are based on a number of assumptions which may or may not eventuate or prove to be accurate. Actual results, performance or events may differ materially from those in such statements. In addition, the opinions expressed may differ from those of other Mirae Asset Global Investments’ investment professionals.
Investment involves risk: Past performance is not indicative of future performance. It cannot be guaranteed that the performance of the Fund will generate a return and there may be circumstances where no return is generated or the amount invested is lost. It may not be suitable for persons unfamiliar with the underlying securities or who are unwilling or unable to bear the risk of loss and ownership of such investment. Before making any investment decision, investors should read the Prospectus for details and the risk factors. Investors should ensure they fully understand the risks associated with the Fund and should also consider their own investment objective and risk tolerance level. Investors are advised to seek independent professional advice before making any investment.
Sources: Information and opinions presented in this document have been obtained or derived from sources which in the opinion of Mirae Asset Global Investments (“MAGI”) are reliable, but we make no representation as to their accuracy or completeness. We accept no liability for a loss arising from the use of this document.
Products, services and information may not be available in your jurisdiction and may be offered by affiliates, subsidiaries and/or distributors of MAGI as stipulated by local laws and regulations. Please consult with your professional adviser for further information on the availability of products and services within your jurisdiction. This document is issued by Mirae Asset Global Investments (HK) Limited and has not been reviewed by the Securities and Futures Commission.
Information for EU investors pursuant to Regulation (EU) 2019/1156: This document is a marketing communication and is intended for Professional Investors only. A Prospectus is available for the Mirae Asset Global Discovery Fund (the “Company”) a société d'investissement à capital variable (SICAV) domiciled in Luxembourg structured as an umbrella with a number of sub-funds. Key Investor Information Documents (“KIIDs”) are available for each share class of each of the sub-funds of the Company.
The Company’s Prospectus and the KIIDs can be obtained from www.am.miraeasset.eu/fund-literature . The Prospectus is available in English, French, German, and Danish, while the KIIDs are available in one of the official languages of each of the EU Member States into which each sub-fund has been notified for marketing under the Directive 2009/65/EC (the “UCITS Directive”). Please refer to the Prospectus and the KIID before making any final investment decisions.
A summary of investor rights is available in English from www.am.miraeasset.eu/investor-rights-summary.
The sub-funds of the Company are currently notified for marketing into a number of EU Member States under the UCITS Directive. FundRock Management Company can terminate such notifications for any share class and/or sub-fund of the Company at any time using the process contained in Article 93a of the UCITS Directive.
Hong Kong: This document is intended for Hong Kong investors. Before making any investment decision to invest in the Fund, Investors should read the Fund’s Prospectus and the information for Hong Kong investors (of applicable) of the Fund for details and the risk factors. The individual and Mirae Asset Global Investments (Hong Kong) Limited may hold the individual securities mentioned. This document is issued by Mirae Asset Global Investments (HK) Limited and has not been reviewed by the Securities and Futures Commission.
Copyright 2021. All rights reserved. No part of this document may be reproduced in any form, or referred to in any other publication, without express written permission of Mirae Asset Global Investments (Hong Kong) Limited.