China is 'Uninvestable'? Think Again - Global Macro Outlook

Co-written by Mr. Laurence Yang and Laurence Holdings Group's research team in Switzerland.


Investors have been unsettled in recent months by a slew of regulatory crackdowns imposed by the Chinese government, leading to some investors calling the Chinese market 'uninvestable'. Here we look at the impact of these regulatory changes on the Chinese financial markets.


First, let's look at some of the key recent developments in China:

  • Low birth rate coupled with an aging population has been one of the top concerns of the central government in Beijing, which led to the regulatory framework been tightened, particularly when it comes to industries that are seen as 'endangering youth wellbeing' in the country.

  • Crackdown on the real estate sector, which is seen by the Chinese government as the main driver of inflated cost of living and the reason why the younger generation in China are reluctant to have children.

  • More regulation for private companies like Tencent and Alibaba on how they handle user data.

  • Officially and unofficially discouraging Chinese companies to list on foreign stock exchanges. Prime example: during its IPO on the NYSE, Chinese ride-sharing giant DiDi found itself caught in the crossfire between the SEC and the Chinese securities regulator CSRC.


So, what is the Chinese government trying to achieve?

At first glance, some investors might found these measures arbitrary, but they should be seen as a part of a course correction designed to ensure continuing economic progress.


China's economic advance over a short period of 40 years has been an unprecedented success story. Reformer Deng Xiaoping, who took office in 1978, laid the groundwork for China's economic miracle. In that year, 98% of China's population lived in poverty. 40 year later, in 2020, Chinese president Xi Jinping announced at the National Congress that China has "completed eliminated absolute poverty within the country", with less than 3% of its population still living in poverty. The IMF now forecasts by the end of this year, China's per capita income will rise to US$11,819, which puts China on the verge of qualifying as a "high income economy" - a sign that China is avoiding the "middle income trap" that eluded many emerging economies in the past.


Under Deng Xiaoping, who famously said: "Black cat or white cat, as long as it can catch mice it's a good cat.", the Chinese government prioritized economic growth and pushed many other policy concerns to the sidelines. The biggest challenges created by this era of rampant economic growth are:

  1. corruption

  2. environmental pollution

  3. widening wealth gap

That has led to President Xi Jinping declaring war on corruption as soon as he took office, which have achieved optimal results by both Transparency International's Corruption Perception Index and World Bank data measurements. Xi's tough approach enjoys wide support amount the country's population at large - who also warmed to his nationalistic rhetoric. Similar success has been achieved in the battle against air pollution.


Although China's economic growth has brought a widespread improvement in prosperity, the benefits have been spread unevenly. World Bank estimates of the Gini coefficient – an economic measure showing the level of income inequality in a country – put China among the most unequal major global economies, behind most of Europe, but ahead of the US - leading to Xi's "common prosperity" speech in 2021.


Implications for the Chinese financial markets

China is still committed as ever to economic expansion, but with a twist - the emphasis is shifting. For the first time ever, the 14th Five-Year-Plan (2021-2025) contained no quantitative/numerical growth - a strong indication that qualitative growth will take center stage.


The "common prosperity" push by President Xi Jinping is intended to enable more citizens to share in the proceeds of economic progress. The Chinese president made it very clear in his speech that the central government does NOT intend to resort to robinhood methods, and they are NOT going to rob the rich in order to help the poor.


These policies are positive for China's long-term growth outlook. Despite recent volatility in the Chinese stock market, yields on Chinese government bond hardly moved, while the currency Chinese Yuan Renminbi rallied to a 6-year-high against most major currencies.


Hang Seng Index, China's most international index traded in Hong Kong - a gauge of foreign investor sentiment on China's equity market.

Historically, the HSI has a very strong correlation with western markets (S&P 500 and DAX), however, that correlation broke down in 2021 and became temporarily inversely correlated.

However, the economic integration (i.e. supply chain) is way too deep for the two markets to be so divergent.


In late 2020, China A50 index broke above the psychologically important multi-year top 15,000 level (blue line). Despite a 20% correction in 2021 after touching the high in February, so far, the broken resistance is acting as a strong support.


The blue-chip benchmark CSI 300 also broke out of the decade-long consolidation triangle and made a new all time high in February 2021.


Our view

  • Recent volatility in the Chinese equity market has only made China a more attractive market compare to its western peers.

  • China is not giving up capitalism as the mainstream media has been portraying. The "common prosperity" push by President Xi Jinping is intended to enable more citizens to share in the proceeds of economic progress. The Chinese president made it very clear in his speech that the central government does NOT intend to resort to robinhood methods, and they are NOT going to rob the rich in order to help the poor.

  • China is avoiding the "middle income trap" that eluded many emerging economies in the past.

  • China is still committed as ever to economic expansion, but qualitative growth, rather than quantitative growth, will take center stage.

  • Hang Seng Index's correlation breakdown is unjustified and largely driven by fear and lack of understanding.

  • Overall, China's equity market remains long-term bullish.


Copyright© 2021 Laurence Holdings Group Limited. All Rights Reserved.






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