Don't Be So Gloomy About China's Economy – Matthews Asia

Recent data signals that a gradual, consumer-led recovery is underway in China, and the two main short-term obstacles to a return to pre-pandemic growth levels are likely to recede in the coming quarters, Andy Rothman at Matthews Asia, an investment specialist said.

He asks, rhetorically: "It's in vogue to be pessimistic about China's economy, but is the consensus view too negative?"

Rothman highlighted that most of the developed world moved on from Covid-19 two years ago, while the last wave of Covid-19 cases and deaths in China only ended in January 2023, restraining household sentiment and spending. With each passing month, Rothman thinks that Chinese consumers should regain more confidence, supported by high savings and strong income growth. The government also took the step in July of voicing enthusiastic support for the private sector, including platform companies, in aneffort to restore entrepreneurs' animal spirits, which have been weak for two years, he said.

The resilience of Chinese consumers and entrepreneurs, as well as the "pragmatism" of the country's policymakers, have often been underestimated, and that is likely the case again today, he added in a note about the country.

China's 10-year, economic track record has been "pretty good." Between 2012 and 2022, China recorded average annual real income growth of 6.2%, compared with 1.4% in the US and 1% in the UK, Rothman added.

In late June, for example, HSBC Asset Management said it thought Chinese equities have scope to perform this year given the economic reopening and positive earnings momentum, saying that the diversification benefits of Chinese equities shouldn't be underestimated.

There are "green shoots" in the services sector, which is the largest part of the economy and the biggest employer.

China will support private firm research into "cutting-edge technology" and "support platform companies to excel in creating jobs." It also calls for "an atmosphere that encourages innovation and tolerates failure" and "enhances the sense of honour and social value of entrepreneurs."

Rothman thinks that Xi's priority is restoring economic growth, and private companies, including the platforms, which are China's biggest employers, so he expects him to follow up with concrete actions. If investors are patient, they are likely to see more evidence of a gradual, consumer-led economic recovery in the coming quarters, as the Covid trauma recedes and the government follows the leadership's directive to get out of the way of business, allowing animal spirits to re-emerge, he said.

A return in confidence will be supported by continued accommodative monetary policy and high savings, he said. The net increase in household bank accounts is equal to USD7.1 trillion. This is significant fuel for a continuing consumer spending rebound, as well as a recovery in mainland equities, where domestic investors hold about 95% of the market.

Rothman thinks that although China's debt problem is serious, the risk of a hard landing or banking crisis is low. Industrial policies have also resulted in China becoming the world's largest producer, consumer and exporter of electric vehicles, and accounting for two-thirds of global EV battery production, as well as about 80% of global solar panel production, he said. China is on track to surpass Japan as the world's largest auto exporter in 2023, after edging out Germany last year, he added.

Meanwhile, he believes that the political relationship between Washington and Beijing is likely to remain strained, but a crisis is unlikely. China's share of global exports in the first quarter of 2023 was 14%, compared with 12.8% in 2017, before the Trump tariffs. More importantly, domestic demand is the primary growth engine in China, he said. As a result of these factors, he believes that the consensus view may be too negative.

I am a contrarian. Buy when others are fearful. There's no better time to buy when prices are low.

Don't Be So Gloomy About China's Economy – Matthews Asia

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bullrider_21OP : EVs stand out for their strong government support. In June, the Chinese government announced a CNY520 billion package of tax breaks over 4 years for EVs and other green cars in a bid to boost automotive sales growth.

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