Finding the balance in China

Kerry Craig

J.P. Morgan Asset Management

Increasing regulatory scrutiny is feeding uncertainty in the Chinese equity markets and has once again raised the question of whether the local Chinese equity market is ‘uninvestable’ from a policy perspective.

The latest changes in the regulatory environment that have disrupted equity markets should be viewed as a challenge, rather than a hindrance, for investors. Chinese officials are managing the world’s second largest economy through the balancing act of the short-term growth trajectory of the Chinese economy with the longer-run policy objectives aimed at creating a much more sustainable economic environment. History shows us that these changes to address the latter are often made when the economy is the strongest.

Admittedly for select sub-sectors, such as education, the recent regulatory changes have altered the long-term fundamentals. However, for much of the Chinese investment universe, the long-term positive growth outlook has not changed, even if the global investor sentiment towards Chinese assets has been shaken.

Further regulatory reforms are still possible for some of the ‘new economy’ industries where the Chinese authorities see the need to balance social outcomes, such as youth protection and appropriate social benefit coverage for workers, as well as improving the competitive environment by allowing smaller players to compete with industry leaders.

Regulatory action in the name of economic, financial or environmental stability will always be a feature of investing in China. But this should be contrasted against the many years officials have spent in creating more open and deep capital markets to encourage foreign investment.

It’s also worth recognizing that regulatory change is not a negative term, and can in fact create investment opportunity. For example, ambitions to become self-sufficient in semiconductor manufacturing and software development as well as achieving greenhouse gas reduction targets mean certain industries stand to benefit from policy tailwinds in the medium to long-term.

The Politburo meeting at the start of August provided more insight into the economic and regulatory policy direction for the rest of 2021. On the economic outlook, the Chinese government recognizes the imbalances in economic recovery. Small and medium enterprises and low-income households have lagged during the current economic recovery and there are signs of slowing in the country’s manufacturing base. This implies that fiscal policy could do more of the heavy lifting in supporting growth for the rest of this year, especially as the 2021 government bond issuance is running below this year’s quota and can be stepped up. Monetary policy has shifted to a neutral stance now, after some modest tightening in the first half of the year. However, this position could also shift if growth momentum eases further.

Chinese equities are no stranger to large corrections

Source: Bloomberg L.P., J.P. Morgan Asset Management. *08/02/21 - 30/07/21. Data reflects more recently available as of 02/08/2021.

It is impossible to predict the bottom of any market correction, but the current downturn is far from unique in the context of the Chinese market, even if the cause is different. The correction in 2015/16 was the bursting of a stock market bubble featuring excessive retail participation. U.S.-China trade tensions hit Chinese equities hard in 2018 as well as a drive to de-leverage the corporate sector. This time around, fiscal and monetary policies are in a more supportive position, especially considering the moderating growth momentum and uncertainties from a pick-up in COVID-19 cases. The current stalemate between policy makers and investors may only be resolved with greater communication on future policy changes to allow time for businesses to adapt and investors to regain confidence in the long-term investment prospects in China.


........
For the purposes of MiFID II, the JPM Market Insights and Portfolio Insights programs are marketing communications and are not in scope for any MiFID II / MiFIR requirements specifically related to investment research. Furthermore, the J.P. Morgan Asset Management Market Insights and Portfolio Insights programs, as non-independent research, have not been prepared in accordance with legal requirements designed to promote the independence of investment research, nor are they subject to any prohibition on dealing ahead of the dissemination of investment research. This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be used as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results. J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our Company’s Privacy Policy. For further information regarding our regional privacy policies please refer to the EMEA Privacy Policy; for locational Asia Pacific privacy policies, please click on the respective links: Hong Kong Privacy Policy, Australia Privacy Policy, Taiwan Privacy Policy, Japan

Global Market Strategist.
J.P. Morgan Asset Management

Kerry Craig, Executive Director, is a Global Market Strategist. Based in Melbourne, Kerry is responsible for communicating the latest market and economic views from our Global Market Insights Strategy Team.

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.