With a very disappointing second quarter and growth of 2.6% on average over the year's first half, the Chinese economy is disappointing and unattainable the 5.5% growth target set by the Beijing authorities for all of 2022. So do we still need to invest in it?
Pandemic and Evergrande still weighing
Let's say right off the bat, if China slows down, its exports are doing well. Thanks to continued strong foreign demand for Chinese products, exports grew 24% year-on-year in July (in CNY). On the other hand, imports are struggling, growing by only 1% over the same period, a sign of anaemic demand in the Chinese domestic market.
The reasons for this weakness in domestic demand are numerous. First, the Covid-zero policy forced the state to impose lockdowns and restrictions on large metropolises, such as Beijing or Shanghai. Contrary to what is done elsewhere in the world, China does not want to live with the virus. A choice in part because Chinese vaccines are less effective in the fight against the virus. And their Western counterparts and a more lax policy would, therefore, in all likelihood, result in a heavier balance sheet.
As a result, the authorities intend to limit population movements as soon as the slightest contagion outbreak is identified. A policy that pays dearly in terms of economic activity takes away the visibility of households and businesses, thus weighing on the economy as a whole.
Added to this are the concerns and distrust of the country's real estate developers. We may not talk about it in the West. Still, the problems of Evergrande and a whole series of other Chinese real estate developers are not solved, and their situation remains fragile. The problem was born with Beijing's desire to clean up the sector, restricting funding to the most indebted actors, and forcing them to divest their activities to others deemed in better health. Laudable, the basic idea was to eliminate the systemic risk that some major players (such as Evergrande) posed to the Chinese financial system.
Laudable indeed, but risky. First, construction is a critical sector in China, and its transition to a vacuum weighs on the economy as a whole. Then, faced with the succession of bankruptcies in the industry and the multiplication of abandoned or non-finished projects and projects, the prices of real estate began to fall.
Finally, since they are unsure if they will ever take delivery of the real estate they buy on a plan, households no longer repay the mortgage credit related to the purchased properties. This poses a growing risk to the Chinese financial system. Sooner or later, Beijing will either have to establish a guarantee fund to ensure that projects already under construction are completed and delivered or guarantee payments made by households as part of a real estate purchase. Measures that would restore confidence and restore order in this sector amid the turmoil.
Towards a multiplication of stimuli
Aware of their problems, the Beijing authorities must also show imagination. In the past, they have often revived economic activity through a massive call for credit. Some of the measures already announced in Spring, as well as the surprise drop in the key rates of the Chinese central bank, announced on August 15, remind us of this same strategy. However, credit may be (slightly) cheaper, but it will not make those who lack confidence and visibility invest.
China will therefore have to go further in stabilizing the real estate market but also get used to living with the pandemic, thus clarifying the horizon of Chinese households and businesses currently faced with great uncertainty. Beijing will therefore have to innovate. New measures to support the economy will come into being soon. After a disappointing second quarter, growth is expected to pick up in late 2022 and 2023.
Taiwan on the horizon
All the economic challenges have added to the tensions around Taiwan. As a trading nation and a primary beneficiary of globalization, China is interested in keeping to business and ignoring the rhetoric coming from the United States as much as possible. A few months before congressional elections, which are expected to be very close and which could result in a return to Republican affairs at the expense of Joe Biden's Democrats, animosity towards China is one of the few issues that is unanimously supported in Washington. In the short term, this animosity and the slowdown in Western demand may weigh somewhat on the vitality of Chinese exports.
But make no mistake: China remains a key player in the global supply chain. And suppose specific sectors find refuge on other skies. In that case, China will continue to play a major role in the coming decades.
By adopting new measures to boost renewable energy production in the United States, Biden promises to spend billions of dollars on products (solar panels, wind turbines, batteries) whose production is dominated by Chinese players. The electric vehicle race will benefit China. Banning the sale of thermal motor vehicles from 2035 and aiming for net zero emissions by 2050 did the same. So China will remain, for decades, a key player if the West wants to respect its climate commitments.
China is currently facing two significant challenges (pandemic and real estate), both created by Beijing's policies (Covid-zero policy and clean-up at the expense of real estate development). As a result, the authorities are more responsible for finding solutions and boosting growth. They will also have to avoid throwing fuel on the fire around Taiwan, a problem whose intensity could decrease after the American Congress elections.
For decades, China has had a long-term vision, supported by a significant investment in natural resources, wherever they may be. An item of considerable expenditure on research and development, aiming to increase its production and dominate all value chains. Thanks to this strategy, it is now a key player in the global economy and dominates the renewable energy sector. As a result, it will play a role in the long journey of the global economy towards a cleaner future. Therefore, we continue investing in it across our portfolio.
