China is set to remain top of mind for investors in 2022 as the country responds to challenges to its growth and internal stability.
After accounting for 30-40 per cent of annual GDP growth over the past decade and leading the global economic cycle into recovery in 2020, Robeco strategist Peter van der Welle said that it remained unclear whether recent policy measures from China would prove effective.
“In 2021, China’s contribution to global growth faltered on the back of a policy-induced deceleration domestically while developed economies caught up,” he said.
“With the monetary and fiscal impulse expected to decrease in the West into 2022, the fate of the Chinese growth trajectory becomes all the more important for the global economy.”
China has launched its “common prosperity” program in response to the uneven distribution of the country’s growth in wealth, which Mr van der Welle said was largely on par with the US as the richest 1 per cent of households own one-third of the wealth.
“It is President Xi Jinping’s fear that if this inequality persists, it will erode the middle class. This would lead to polarisation and the rise of the kind of populism seen in the US, potentially challenging the Communist Party,” he said.
“The Chinese political establishment realises that the country’s major problems are to be found at home, given a very high total debt-to-GDP ratio of 270 per cent, an ageing population that is starting to gradually worsen the dependency ratio, and increasing environmental costs.”
The common prosperity program is focused on sectors with some of the most significant concentrations of wealth and market power including real estate, technology and education.
On whether the program had been effective and if investors might expect less interventionism in the corporate sector this year, Mr van der Welle said the evidence was inconclusive.
“In order to burnish his credentials as a socialist party leader ahead of the 2022 Party Congress, President Xi will likely be determined to safeguard social stability by engineering a soft landing for the economy in the near term,” said Mr van der Welle.
“Easing monetary policy through further cuts in the reserve requirement ration (RRR) and a bottoming out of the credit impulse in H1 2022, along with the use of fiscal stimulus and a loosening of housing regulations are the most obvious policy tools.”
China’s zero-tolerance approach to the COVID-19 pandemic may also see lockdown measures tightened in response to the Omicron variant, potentially suppressing domestic demand further.
The People’s Bank of China and the country’s finance ministry indicated their plans late last month to stabilise growth through monetary policies and lower taxes.
“The Common Prosperity program is not a momentary event. This leaves considerable uncertainty on the table for investors,” warned Mr Van der Welle.
“Although China’s policy muscles have clearly been flexed, the jury is still out on whether they can still do the heavy lifting.”
Jon Bragg
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.
