Page 27 - DIY Investor Magazine | Issue 33

However, we know by now that these measures have a significant drag on the economy where they are imposed – not just for local incomes and consumption, but by disrupting supply chains across the country and indeed the world.
The prospect of more lockdowns throughout the year, which to us look inevitable to protect a population with next to no natural immunity and with vaccines of unknown efficacy against Omicron, is a poor one for economic growth in China.
‘HIGHER CHINESE GROWTH WILL HAVE TO BE DRIVEN BY DOMESTIC DEMAND THIS YEAR’
BROADER ECONOMIC CONCERNS
Unfortunately, the Chinese economy was not in rude health heading into the year, even before the latest Covid-induced headwinds.
The key positive driver for the economy in recent quarters has been strong global demand for manufactured goods, boosting Chinese exports, leading to strong manufacturing fixed asset investment growth.
This growth support from exports is now likely to fade
as the rest of the world moves away from the so-called “Covid economy” and spends more on services again (and consequently less on goods). Risks to global growth have also clearly risen recently from the conflict in Ukraine and the subsequent spike in energy prices, which I discuss further below.
It seems clear, therefore, that higher Chinese growth will have to be driven by domestic demand this year. Which brings us to...
REGULATION
Barrels of ink were expended last year talking about the regulatory environment in China and the impact on the stock market, so there is little point repeating it all again here.
With a weaker economy, there may be even more pressure for “burden-sharing” by profitable companies. We have already seen this happen this year, for example in the requests for internet platforms to cut the food delivery fees they charge restaurants hit by lockdowns.
However, the government may also be starting to recognise that the relentless regulatory onslaught of the last 15 months has hurt private sector confidence and investment, and hence economic growth.
The market’s reaction to mollifying (albeit vague) announcements by the government on 16 March suggests that sentiment on the hardest-hit stocks can swing rapidly on any change in the regulatory stance.
Without a crystal ball (or rather a source close to the powers that be), there is little insight we can add on the timing or extent of such regulatory changes, however, as they are driven by political considerations above all else.
This was a key factor weakening market sentiment in 2021, in particular the second half which saw slumping retail sales and a deflating property sector as developers such as Evergrande ran aground, and credit growth slowed materially.
Market hopes of significantly looser policy have been disappointed, with stimulus moves so far being modest and measured as the government remains wary of reigniting a debt cycle or inflating asset price bubbles.
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DIY Investor Magazine · Apr 2022