China - On the path to recovery

Focus on the future

02 Jul 2020

China was the first country to experience COVID-19, but it has lead the world in moving out of lockdown. In part, that's because China got serious about limiting the spread of the disease.

Strict control measures, coupled with extensive contact tracing, has helped control the spread and we are now seeing very few new local cases.

On the path to recovery

Now the focus shifts to the future and China's economic outlook after lockdown measures eased in early May.

Looking at recent data, China's economy is one of the first in the world to show signs of a recovery from the slowdown caused by the COVID-19 pandemic.

Activity indicators, like inter-city traffic and energy consumption, are improving, and headline economic data, such as industrial production and real estate demand, were better than expected in May.

Interest rate and tax cuts came quickly in February and March, and at the recent 'Two Sessions' government meeting in May we saw a commitment to infrastructure investment, and particularly in the kinds of infrastructure, like 5G telecommunications networks, that will support China's long-term growth prospects.

Huge rebound unlikely

But for all the positive signs, we should temper our expectations for China's growth outlook. Given the hit to the economy from COVID-19, a swift return to the 6%-7% growth numbers of the past look unlikely in 2020.

Government policy, though supportive, has been measured. We feel the government is providing targeted support to the economy as is necessary, but is refraining from making excessive policy moves.

And that's different from past crises.

During the Global Financial Crisis, China launched a massive stimulus to boost both the domestic and global economy, which propelled growth to 10%+ and kept the global economy moving but saddled the domestic financial system with a high debt load.

China has shifted its emphasis

Having spent the last five years deleveraging the economy, the Chinese government is now focused on supporting the domestic economy. Why? Because now domestic drivers, like consumer demand, underpin the economy, which is a major change from 10 years ago when exports were the key driver.

Coming reforms will boost China's long-term prospects

Now we believe the government's focus is squarely on the quality of growth, hence the reason why it abandoned an explicit growth target in its recent work report at the 'Two Sessions' government meeting in Beijing in May.

We believe the government's emphasis will shift to passing reforms to support the long-term development of the domestic economy, specifically by boosting urbanization, expanding the services sector, opening up financial markets, promoting innovation, and reforming the state-owned sector.

And that's welcome news for China's future and also for investors.

Why? Because reforms will support fundamental domestic investment themes, such as the growth of urbanization, consumer demand, digital economy, services and innovative technology, that we believe hold good prospects for the future.

More than that, reforms will support China's longer-term growth story. China needs the above reforms to keep its growth engine working over the longer term if, as expected, it is to take the lead as the world's largest economy within the next ten years.

Focus on the future and choose China

If, as we expect, China's economy grows in size and influence, so global investors will have to adjust too. Currently, the world is underinvested in China - China only accounts for 4.9% of the MSCI ACWI, despite China accounting for more than 15% of the global economy, in PPP terms.

So for those of you investing for tomorrow, we believe there's a strong case to invest in China today. Acting now means not only participating in China's gradual economic recovery but also in long-term fundamental trends that we expect will drive China in the future.

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