Strategy Note /
China

China slowing, not stopping: Policy stimulus and equity inflows in 10 charts

  • China deceleration: export demand helping manufacturing but zero-Covid lockdowns, property defaults hurting consumption

  • But this is not a surprise. Indeed, slowdown was less sharp than expected – GDP grew 4% yoy in Q4 versus 3.6% consensus

  • And deceleration is prompting policy stimulus, for which there is plenty of room (real interest rate is still positive)

China slowing, not stopping: Policy stimulus and equity inflows in 10 charts
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
17 January 2022
Published by

China growth is decelerating but this is no surprise and is not actually as sharp as feared, with Q4 2021 GDP up 4% yoy, compared with the 3.6% consensus forecast, according to the latest release earlier today.

An export demand recovery is helping industrial manufacturing but zero-Covid lockdowns and property sector distress is hurting consumption and new investment.

Critically, the deceleration is prompting policy stimulus. The central bank's one-year interest rate (on medium-term lending facilities that the government extends to banks) was cut by 10bps today, for the first time since Q1 20.

There is plenty of room for monetary and fiscal stimulus, unlike in many other parts of emerging or developed markets. For example, the real interest rate is still positive (1.4%) and gross government debt is merely 70% of GDP.

Furthermore, acute FX rate sensitivity to any stimulus measures, common in most of EM, is lacking, given the current account balance is in surplus (1.5% in 2022, according to IMF forecasts) and FX reserves import cover is over 14 months.

Risk-reward in China equities looks attractive this year in the context of:

  • Ample room for policy to counter slowing growth;

  • Many disruptive risks now more widely appreciated, eg

  • Valuation close to or at a discount to the historical average (depending on which variable and which index is used); and

  • China is still under-represented in global equity indices.

Below, we present 10 charts to illustrate this.

1) China is slowing with manufacturing outpacing retail

2) China monetary policy: interest rate cut

3) China monetary policy: reserve requirement cut

4) China positive real interest rate implies room for stimulus

5) China fiscal policy still accommodative, deficit over 6%

6) China space for fiscal stimulus, about 70% debt to GDP

7) China equities valuation close to historic average

8) China still under-represented in global equity indices

9) China net foreign flows into equities accelerated in 2021

10) China equities summary of top-down positives and risks

Related reading

2022 EM equity strategy: Passive index tracking is not the answer, January 2022

China conundrum: Foreign inflows despite all the bad news, September 2021