- China’s economic rebound from COVID-19 will likely be gradual. We anticipate growth will pick up in 2021 as more fiscal stimulus is pumped into the economy.
- Stimulus policies are likely to shift in favor of technology-related infrastructure, rather than property or lending to state-owned enterprises, in a push to create more self- sufficiency amid trade tensions.
- We see pockets of growth for premium consumer brands and certain companies within the biotechnology, internet services and technology-related fields.
- China is home to many innovative companies with large addressable markets, offering the potential for sizable long-term growth in market value.
China was the first country to shut down its economy to blunt the spread of COVID-19, and the first to emerge. As the world’s second-largest economy and a key cog in supply chains and consumer markets, China’s economic progress over the next 12 months will play a vital role in restarting the worldwide economy.
Since the outset of the pandemic, China’s policymakers have been far more restrained in terms of stimulus compared with the U.S. and European Union. They have sought to stabilise the economy rather than flood it with too much credit like in prior economic downturns. While tensions with the U.S. continue to weigh on its economy, China has developed a powerful domestic demand engine and government leaders are focused on increasing domestic spending and unlocking the significant savings of the country’s populace, which are much greater than for Western countries.
So far, China equities have fared relatively well as measured by the returns of the benchmark MSCI China Investable Market Index. But bouts of volatility are likely amid a tepid rebound in consumer activity, supply chain concerns and differing opinions about the strength of China’s economy. This could offer investors with a bottom-up, long-term approach selective opportunities to take advantage of periods of market weakness, especially given the persistent and potentially increasing geopolitical tensions.
We asked two longstanding Capital Group portfolio managers with years of experience living and working in Asia for their views on how China’s 'getting back to work' and what kinds of companies might benefit. We’ll begin with a macro-level perspective from our chief China economist.
Recovery likely gradual and stimulus unlike past downturns
Stephen Green, Capital Group economist in Hong Kong
Overall, China’s industrial economy is largely operating back at normal levels, and leading activity indicators such as trucking volumes, electricity production and weekly cement shipments are mostly back to 2019 levels or higher. However, I believe the return of growth will be slow and gradual.
Industrial profits remain weak and China’s exports could decline as much as 20% to 30% on a year-over-year basis. Consumption is generally lagging due to elevated unemployment levels and fears of possible pay cuts. People still seem to be reticent to go out of their homes, and some of this is reflected in data for travel and dining, which are well below 2019 levels.