Chapter one: What’s your next move in China investing?

Speculations and at times aggressive rhetoric on where China stands and its role in the conflict brought on more unease regarding Chinese assets, since any political action to support Russia could bring international sanctions. Speculations so far have remained speculations, and even as China refuses to condemn the Russian attack, it has made no move beyond the line in the sand. However, the close economic links with Russia continue. The ongoing war has disrupted the world’s supply chain as trade routes on land, air and sea experience interruptions. China is not immune to higher commodity and energy prices—or a global economic slowdown or possible deglobalization triggered by the war. Partly because its economy relies more on domestic growth and partly because it is not participating in western sanctions against Russia, in the long term we think China could be insulated from some possible spillovers compared to the most western countries.

Russia continues to trade with China in oil and gas. There are also talks of a new energy agreement between China and Russia that could include new oil pipeline projects and Chinese investment in Russian energy companies after sanctions drove the exit of western ones. Whether China’s economic cooperation with Russia would provoke an international response remains to be seen, but ultimately the war is driven by geopolitical power struggles and we don’t believe it’s in China’s interest to get involved or take any action that would result in a wide-reaching backlash at this time.

It would be a mistake, however, to think that China is doing nothing about the economic toll. With stoppages in logistics, road transportation and manufacturing production in port and industrial cities, the government has reshuffled more of the container traffic from roadway to waterway, trying to ease some of the pressure from the disruptions in the flow of industrial goods. Some lockdown measures have recently been relaxed—there are different levels of restrictions and some neighborhoods are allowed a limited amount of movement and activities—and production has in fact restarted for many companies. China has promised to do more, hoping stronger monetary, fiscal and credit support would provide relief and buffer the overall growth shock that we believe should have a short- to medium-term in impact.

Although we think there is still room for Chinese interest rates and monetary policy to be more accommodative, efforts such as investment proposals in infrastructure, renewable energy and property support could help China get through this rough period. These stimulus efforts should carry a bigger weight toward the second half of the year, when COVID is—hopefully—under better control, and help the economy get back on track in the long run. It's also important to remember that China’s pace of growth, though slowing, is still markedly faster than the rest of the world.

That said, new guidelines to ease the rules governing escrow accounts (trusts holding pre-completion cash) appear promising, and if implemented, they could provide much needed liquidity to property developers after last year’s cash crunch and indiscriminate write-offs. State-owned enterprises (SOEs) are playing a greater role, moving in to carry out merger and acquisition (M&A) activities by acquiring projects or other assets from distressed developers.

We are optimistic that conditions will improve after the Omicron flareups ease, particularly for the better-capitalized companies with solid balance sheets and more readily-accessible funding channels. In the long term, we expect that these property developers will survive the current industry consolidation and emerge in an even stronger position.