Listen to Washington speak and it is clear: tariffs aren’t going away, the tech decoupling is happening (with roughly 300 companies on the so-called Entity List that cannot buy American computer hardware without government permission) and sanctions for those behind the imprisonment of Uyghur Muslims in Xinjiang. Even though some wishy-washy European companies (Asics and Hugo Boss) are going to still do business in Xinjiang, what is clear is that the U.S. under Biden is not much different than the U.S. under Trump if you are looking at this from Beijing.
If Wall Street bet on a Biden reversal, so far their bets have not paid off.
China’s government is circling the wagons. They are becoming more inward focused, and to some extent the market should be okay with that anyway. Over the last four weeks, China has underpeformed the emerging markets, the Dow, and even Brazil has done better despite undergoing an ugly viral mutation of Sars-Cov-2 that’s hurting its recovery and canceled Carnival in Rio.
As the U.S. looks to decouple more of its supply chains from China, the domestic companies that serve domestic consumers should do well. Let’s not forget that China has over 1 billion people, its government has money growing on trees, and foreign investors are funding its companies — if those trees needed water, Wall Street and London are running the sprinklers all day long.
Unless the U.S. was successful at banning (or shaming) Wall Street investments away from mainland China securities, then China is a growth story. It’s definitely a better growth story than Europe.
If you’re thinking whether or not it’s time to bail on the A-shares, here are some economic numbers to chew on.
China’s Growth Story
China’s annual legislative meeting set a GDP growth target of 6% or higher for 2021, lower than the 8.4% consensus by market participants quoted in Bloomberg. China is setting the market up for an upside surprise.
With this year set to be one of growth recovery, base effects alone should see China more or less regaining trend growth from the fourth quarter 2020, which would be between 5% and 6% this quarter.
From August onwards, though, retail sales of consumer goods declined and made year ending consumer sales fall by 3.9%. Considering the economy faced massive restrictions last year, those numbers are actually pretty solid.
The pandemic’s impact on mobility also hurt the services industry, especially airlines, hotels, tourism, restaurants and shopping. As a result, consumption shaved half a percent off of China’s GDP and marked the first time consumption hurt China’s growth in more than 35 years.
Both central and local governments have been asked to take additional measures to expand consumption nationwide. The 2021 budget includes RMB3.65 trillion ($610 billion) in special local government bond issuance (only 2.7% less than last year and around 70% more than in 2019, according to BNP Paribas) and RMB610 billion ($93 billion) in the central government’s capital spending, up 1.6% from 2020.
The recent Two Sessions meeting in Beijing also saw the approval of an expanded scope for special local government bond spending to increase capital inflow from the locals and foreigners alike. They’ll assume the risk of China debt.
The general budget deficit is expected to stay at 3.2% of GDP, only 0.4 percentage points below 2020’s defict, according to government planners.
China’s official urban unemployment rate fell to 5.2% last year. It only peaked at 6.2% prior to the lockdowns in Hubei province, home to the Sars2 outbreak. No one believes it’s that low.
Analysts from BNP Paribas think the unemployment rate is “much higher”.
“We think the actual jobless rate should be much higher, considering millions of closures of small and micro-business and a decline of 5.2 million migrant workers,” says XD Chen, chief China economist at BNP Paribas.
In 2021, another 9 million college graduates are due to enter the job market.
To mitigate funding shortfalls, Beijing said it will increase transfer payments to local government by 7.8%. The central state-capital budget will transfer RMB 10.2 billion ($1.6 billion) to local governments this year, which doesn’t seem all that generous for China. That’s like $1 per person.
Gone are the days of China spending like a drunken shuǐshǒu.
“The lower-than-expected GDP growth target indicates that China intends to deal with financial risks and other challenges to cement growth for the medium term,” says Chen.
Beijing is aiming for a sustainable exit from government spending, especially given that this year’s budget is more expansive than some had anticipated. China is worried about its debt and does not want to end up like Japan, especially given that it is much poorer than Japan.
Look for China to continue to push its debt onto Wall Street. And look for Wall Street to keep buying unless Washington makes decoupling so ferocious that it becomes nearly impossible to buy in.
When that happens, then the bull market in China would be over as retail investors might be less excited about China stocks knowing they’re losing interest from foreign buyers.
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