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China is an odd but effective refuge from the coronavirus crisis
Prospects for mainland markets seem attractive compared with virtually anywhere else
HENNY SENDER
JPMorgan’s economists wrote: 'If we are right, China will be first in, first out of a virus-induced slowdown' © Reuters
It may seem strange to argue that the origin of the coronavirus outbreak — China — is also a good place for investors to seek refuge from it. Yet there a number of reasons to believe that prospects for mainland markets are attractive compared with virtually anywhere else, whether in terms of policy, macroeconomic factors or the strength of some individual sectors.
Yes, China is being hit hard, and will continue to be hit. Economists at JPMorgan estimated this week that first-quarter gross domestic product will collapse by almost 50 per cent, on an quarter-on-quarter annualised basis, citing weak January and February figures for industrial production, retail sales and fixed-asset investment.
But among the reasons for relative bullishness, one of the most important is the differing responses of policymakers on both sides of the Pacific.
The founder of one Hong Kong-based credit and macro hedge fund last week lamented that “central banks in developed markets will soon have nothing left,” referring to interest rates rooted near zero and all manner of quantitative easing programmes already under way.
“The Fed kept building on the bubble,” the founder said. “Now, we are close to the end of effective QE and monetary policy.” By contrast, China appears to have options. According to Taimur Baig, chief economist at DBS in Singapore, the country’s monetary policymakers “look smart” as “they have kept their powder dry.”
Mr Baig noted that the People’s Bank of China could have flooded all markets with liquidity to ease all kinds of strains. But that would not have been consistent with the “economic imperative” of getting corporate China to rely less on debt to fund its growth.
Instead, the PBoC has adopted a more targeted approach, encouraging banks to lend to the small and medium enterprises that support so many jobs. And while the central bank has cut the required reserve ratio applied to banks, it has left deposit rates intact.
That allows households to continue to earn something on their savings — unlike consumers in Japan, Europe and the US. Moreover, precisely because the first quarter was so horrendous in China, the second quarter will look much better by comparison.
“If we are right, China will be first in, first out of a virus-induced slowdown,” wrote JPMorgan’s economists, noting recoveries in the bank’s daily trackers of economic activity.
Some of that optimism is reflected in asset prices, which have been more resilient than in many markets elsewhere. China’s equity benchmark, the CSI 300, is down about 12 per cent since the turn of the year, less than half the drop of the S&P 500 in the US.
The renminbi has held reasonably steady against the dollar, while the bond markets have been receiving record volumes of inflows from foreign investors.
“It seems unlikely that China is the solvency black hole in the system,” said Louis Gave of Gavekal Research. Meanwhile, normality is beginning to return to the no-longer deserted streets of mainland cities.
Zhang Yichen, head of Citic Capital and a big investor in the chain of McDonald’s restaurants on the mainland and in Hong Kong, said consumers were “still OK. Ninety per cent of our [restaurants] are open and we see an 80 per cent recovery in volumes.” Others share his bright outlook.
Rebecca Chua, founder of Premia Partners, an Asia exchange traded funds specialist, said the economic effects of the viral outbreak had not been felt fully in many parts of the world. But in China, she said, “we are seeing surprises on the positive side”.
One of those is what Ms Chua calls the “accelerating digitalisation” of the economy, caused in part by enforced lockdowns.
With many schools closed, Alibaba’s Ding Ding — a free communications platform, known as DingTalk outside the mainland — has seen surges in volume as most education moved online.
Many companies have put their entire staff on Tencent’s WeChat Enterprise, sharing documents and taking advantage of its Zoom-like features for communication in a virtual world. On Wednesday, as Tencent reported fourth-quarter earnings, it said that 1.16bn user accounts had logged in at least once in December across its Weixin and WeChat platforms, up 6 per cent on a year earlier.
“It is not just that there is more traffic,” Ms Chua added. “The behavioural change is huge.” And underpinning all this is a deep, structural shift.
Since China joined the World Trade Organization almost 20 years ago, demand from the country has lifted the fortunes of the rest of the world, as it imported raw materials from emerging markets and luxury goods and services from developed countries. After the 2007-09 financial crisis, too, stimulus-fuelled demand from China helped propel the world’s recovery.
Now, though, as China turns from being a capital exporter to importer, that is likely to change. “There is no global co-ordination,” said the hedge fund manager.
“China has no incentive to bail out the rest of the world this time.”
https://www.ft.com/content/211c3db0-682b-11ea-800d-da70cff6e4d3
Prospects for mainland markets seem attractive compared with virtually anywhere else
HENNY SENDER
It may seem strange to argue that the origin of the coronavirus outbreak — China — is also a good place for investors to seek refuge from it. Yet there a number of reasons to believe that prospects for mainland markets are attractive compared with virtually anywhere else, whether in terms of policy, macroeconomic factors or the strength of some individual sectors.
Yes, China is being hit hard, and will continue to be hit. Economists at JPMorgan estimated this week that first-quarter gross domestic product will collapse by almost 50 per cent, on an quarter-on-quarter annualised basis, citing weak January and February figures for industrial production, retail sales and fixed-asset investment.
But among the reasons for relative bullishness, one of the most important is the differing responses of policymakers on both sides of the Pacific.
The founder of one Hong Kong-based credit and macro hedge fund last week lamented that “central banks in developed markets will soon have nothing left,” referring to interest rates rooted near zero and all manner of quantitative easing programmes already under way.
“The Fed kept building on the bubble,” the founder said. “Now, we are close to the end of effective QE and monetary policy.” By contrast, China appears to have options. According to Taimur Baig, chief economist at DBS in Singapore, the country’s monetary policymakers “look smart” as “they have kept their powder dry.”
Mr Baig noted that the People’s Bank of China could have flooded all markets with liquidity to ease all kinds of strains. But that would not have been consistent with the “economic imperative” of getting corporate China to rely less on debt to fund its growth.
Instead, the PBoC has adopted a more targeted approach, encouraging banks to lend to the small and medium enterprises that support so many jobs. And while the central bank has cut the required reserve ratio applied to banks, it has left deposit rates intact.
That allows households to continue to earn something on their savings — unlike consumers in Japan, Europe and the US. Moreover, precisely because the first quarter was so horrendous in China, the second quarter will look much better by comparison.
“If we are right, China will be first in, first out of a virus-induced slowdown,” wrote JPMorgan’s economists, noting recoveries in the bank’s daily trackers of economic activity.
Some of that optimism is reflected in asset prices, which have been more resilient than in many markets elsewhere. China’s equity benchmark, the CSI 300, is down about 12 per cent since the turn of the year, less than half the drop of the S&P 500 in the US.
The renminbi has held reasonably steady against the dollar, while the bond markets have been receiving record volumes of inflows from foreign investors.
“It seems unlikely that China is the solvency black hole in the system,” said Louis Gave of Gavekal Research. Meanwhile, normality is beginning to return to the no-longer deserted streets of mainland cities.
Zhang Yichen, head of Citic Capital and a big investor in the chain of McDonald’s restaurants on the mainland and in Hong Kong, said consumers were “still OK. Ninety per cent of our [restaurants] are open and we see an 80 per cent recovery in volumes.” Others share his bright outlook.
Rebecca Chua, founder of Premia Partners, an Asia exchange traded funds specialist, said the economic effects of the viral outbreak had not been felt fully in many parts of the world. But in China, she said, “we are seeing surprises on the positive side”.
One of those is what Ms Chua calls the “accelerating digitalisation” of the economy, caused in part by enforced lockdowns.
With many schools closed, Alibaba’s Ding Ding — a free communications platform, known as DingTalk outside the mainland — has seen surges in volume as most education moved online.
Many companies have put their entire staff on Tencent’s WeChat Enterprise, sharing documents and taking advantage of its Zoom-like features for communication in a virtual world. On Wednesday, as Tencent reported fourth-quarter earnings, it said that 1.16bn user accounts had logged in at least once in December across its Weixin and WeChat platforms, up 6 per cent on a year earlier.
“It is not just that there is more traffic,” Ms Chua added. “The behavioural change is huge.” And underpinning all this is a deep, structural shift.
Since China joined the World Trade Organization almost 20 years ago, demand from the country has lifted the fortunes of the rest of the world, as it imported raw materials from emerging markets and luxury goods and services from developed countries. After the 2007-09 financial crisis, too, stimulus-fuelled demand from China helped propel the world’s recovery.
Now, though, as China turns from being a capital exporter to importer, that is likely to change. “There is no global co-ordination,” said the hedge fund manager.
“China has no incentive to bail out the rest of the world this time.”
https://www.ft.com/content/211c3db0-682b-11ea-800d-da70cff6e4d3
