Can China’s policy shift turn things around?

Market volatility in China has been tremendous in recent weeks due to the culmination of a series of expected and unexpected events. A slowing economy, deteriorating COVID situation in various cities such as Shenzhen and Hong Kong as well as lingering fears of further regulatory clampdown exacerbated the investor nervousness that was already heightened from the shock of Russia’s invasion of Ukraine, high commodity prices, weaker global growth prospects, the threat of US delisting of China-based companies and the start of the Federal Reserve’s interest rate hikes.

Under the gravity of external and internal issues, China wrapped up its annual parliamentary meetings called the Two Sessions last week, laying out long-term plans for social, economic and environmental policies while calling economic stabilization an immediate priority. With the announcement of a 5.5% growth target for 2022—higher than market expectations—we believe stronger monetary, fiscal and credit support is likely to have to come from Chinese policymakers to provide the economy and markets with more backup. And backup is needed: Selloffs in Chinese equities this month were indiscriminate—though most also bounced back in subsequent rally.

What led to this precarious position were war in Ukraine and China’s close ties with Moscow. Speculation on China’s involvement runs rampant, even though Chinese leaders have called for dialogue between Russia and Ukraine, and have offered to play a mediator role to help move towards a peaceful settlement. Nonetheless, these speculations will continue to cloud markets in the near term. In this environment, is the China investment case still sound, and where should investors focus?

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