Chapter one: What’s your next move in China investing?
Investing in China lately has come with higher risks and volatility, but the scale and variety of opportunities on offer remain compelling to those looking for returns across asset classes for the long run.
Have you played Xiangqi before? Xiangqi, also called Chinese chess or Elephant chess, is a popular strategy game played by Chinese people from all walks of life. With two armies battling it out on the chess board, it has a lot in common with International Chess, Indian Chess, Shogi (Japanese) and Janggi (Korean). A player’s quick tactics in opening the game and advancing pieces across the river—together with a well thought out strategy—are key elements to the ultimate victory of capturing the enemy’s general. But finding the right moves is not easy. The same can be said about investing in China, with COVID resurgences in major Chinese cities, lingering regulatory risks, property market distress, the start of an aggressive US monetary tightening cycle, and most devastatingly, the war in Ukraine. Have these recent events changed the momentum on the China growth board? Has your China investment approach changed?
The General cannot move outside the Palace
War in Ukraine
War in Ukraine
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Market volatility in China had already been at an elevated level in recent months on slowing (but still above developed market) domestic growth, coupled with decelerating global growth and lingering fears of further regulatory clampdown before Russia’s invasion of Ukraine, which sent nervous investors into a frenzy and caused some to actively look for the exit. It is impossible to predict how the war will develop, but we unfortunately expect a prolonged period of fighting in Ukraine, with a quick resolution to the war and the sanctions on Russia unlikely.
The Linked Horses formation grants safe but imperfect protection
COVID outbreak and lockdown, dynamic zero policy
COVID outbreak and lockdown, dynamic zero policy
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The war is not the only deterrent to growth. Omicron outbreaks in China and the resulting citywide lockdowns in major hubs such as Shanghai are also raising growth concerns, as well as questions on whether the dynamic zero tolerance COVID policy is sustainable or the right approach for China. After the initial outbreak more than two years ago, the country has had remarkable success containing the pandemic up to the current flareups, with significantly fewer deaths than some of the other major economies, but it is now almost alone in putting the welfare of the most vulnerable in society ahead of economic recovery and market sentiment. Part of the hesitation in scaling back the restrictions and “living with the virus” we believe is the inevitable increase in deaths. China has so far been relying on domestically developed inactivated vaccines and is accelerating the development of its own mRNA vaccine. Meanwhile, it will continue to adhere to painstaking measures like travel restrictions, mass testing and large-scale quarantines to contain the spread of the virus.
Cannot fire the Cannon without a mount
Property market distress, regulatory clampdown
Property market distress, regulatory clampdown
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COVID resurgences have not only disrupted the global supply chain, they are also keeping the beleaguered housing sector down. And China's fixed income strategies are impacted by it. After last year’s regulatory clampdown on overleveraged housing developers sparked fears of contagion risk in the financial system, the government has since stepped back and turned more supportive, loosening credit controls and reducing home purchase down payment requirements in certain cities. But home sales, prices and construction have yet to regain a footing and recover from last year’s rapid declines before the Omicron wave and mobility controls hit. We expect volatility to continue in this sector at least over the rest of the year before a clearer policy is articulated and implemented.
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