Alena Isakova, lead manager of the Waverton Strategic Equity Fund, considers the position of China and its current economic landscape
China, one of the world’s dominant economic forces, has recently been in the headlines of the financial press as it has encountered a series of challenges. While Waverton are predominantly bottom-up investors, and despite exposure in the Waverton MPS being fairly limited (2.16% in a Balanced portfolio), we have heard an increasing number of queries on the region recently, and have outlined our thoughts here.
Covid-19 recovery: Expectations vs. Reality
The anticipated post-Covid rebound did not live up to expectations. Instead of a recovery to robust consumer spending, infrastructure investment, and relatively strong economic outlook compared to the rest of the world, the momentum was short-lived. This development was disappointing, especially given China’s initial successful containment of the pandemic in 2020.
Property and the broader economy
A significant concern for local authorities over the last decade has been the property sector, which normally accounts for about 30% of the country’s economic output. Regulatory measures were introduced in August 2020 to curb developers from carrying excessive debt and threatening the stability of this critical sector, which could (due to its size) have wide reaching impacts on the rest of the economy. While the basis for these regulations had merit, the resulting uncertainty in operations for the country’s largest property developers – leading to the collapse of Evergrande, which was once China’s second largest property developer worth $51bn – has plagued both consumer and business sentiment.
In addition to the immediate impact, the timing of the property regulations amplified uncertainty post-Covid, which was further compounded by significant regulations imposed on the technology giants and education companies in 2020 and 2021. The repercussions are evident: consumer savings are growing and private sector loan growth is declining, as both corporates and consumers behave more conservatively to protect against more hardships in the near future.
The question of youth unemployment
China’s decision to stop reporting its youth unemployment data has raised eyebrows and concerns; the last known figure was an alarming 21%. There are several theories on why this number has ballooned in recent years, including the increasingly cautious stance from the corporate sector limiting headcount expansion and the significant hit to the hospitality sector after 3 years of Covid-related disruption. In addition, we cannot overlook the wealth effect of China’s one-child policy.
Over the 35 years that China had imposed a one-child policy, the Chinese GDP per capita had grown from around $200 in 1980 to $8,000 in 2016 when the policy was abolished. The resulting wealth creation has been directed to just one heir per family, potentially giving that individual more financial independence and the freedom to delay entering employment after graduating. This unique dynamic further complicates the current economic scenario.
Our view
While the present economic landscape may seem challenging, we believe that Chinese equity valuations are discounting significant uncertainty in the near term. If the authorities can stabilise the property sector, we feel this will be a meaningful positive development for both consumer and corporate sentiment in the region. However, as significant fiscal stimulus appears unlikely at present, we anticipate some stabilisation of comparative economic figures in the next year as opposed to a significant rebound. We are also looking to see whether the recent policy support for the property sector will have a meaningful impact.
Exposure within Waverton’s MPS
