The sustained strength of equity markets this year invites memories of 2019 when stocks notched up gains of more than 25 per cent with barely a hiccup. Risk markets have recently faltered, however, even as more of the global economy tries to normalise after repeated
Covid-19 related lockdowns.
The challenge to those of a bullish persuasion has been threefold. Globally, after more than
a year of beating forecasts, economic data is now falling short – the expected re-opening boom isn’t quite as loud as hoped.
Secondly, the surge in inflation, driven by stronger demand, supply shortages and base effects, seems likely to persist for longer than expected and is encouraging central bankers to begin the process of policy normalisation (an end to quantitative easing and, eventually, higher base rates); equity investors would like the monetary spigot to remain open – forever.
Finally, Covid-19 is not going away. With the jump in projected company earnings starting to fade, profits from equity investment have been there to take.
Covid-19 apart, these moves are part of the normal ebb and flow in risk markets; they won’t last long in the memory. Perhaps the most enduring market development in 2021 will be the Chinese Government’s direct interventions in their own markets, partly explaining why Chinese equities have fallen 8% year-to-date when US stocks have risen 18%.
Chinese parents are far from alone in prizing a good education but in China good school grades play an outsized role in determining career opportunities. In July, President Xi ruled that private sector tutoring for primary and middle school students must now be delivered on a non-profit basis; he also banned coaching during the summer, when the industry is busiest. This crushed education tech companies with for example Gaotu Techedu losing 98% of its
Next up were moves against online gaming aimed at children with the Government likening gaming to “spiritual opium”. The Chinese company Tencent lost $60 billion of its market value on the news.
In the real world one cannot be critical of Xi’s actions; few would oppose moves to limit a child’s screen time and efforts to ensure that premium school grades can’t simply be bought. However, investors naturally dislike such significant and sudden interventions and worry about what comes next.
Moves against big tech are not new. What makes the Chinese crackdown different from that building in the US and EU is its speed and certainty; we won’t see Chinese companies pressing their case and delaying change in the courts.
Lying behind China’s actions is a determination to maintain social stability, equality and growing concern around a demographic time bomb. China, like all major economies, has a rapidly ageing population and is running out of workers. China’s birth rate this year is likely to be just over 11 births per 1,000 people – it was 12.7 in 2013 – and this year, some regions in China are seeing birth rates fall by 17% year on year.
One forecaster suggests that the number of babies born in 2021 may fall to 1950 levels. A rising cost of education may be one reason why Chinese mothers continue to have fewer babies even though the number of children allowed per family was increased in 2016; wealth disparities have had a disproportionate impact on education and career prospects. China may have a huge economy but individually, the Chinese are not that well-off: per capita national income grew
by just 2% in 2020 and is nearly 20% below
that in Romania. Income inequality in China
It seems unlikely that the Chinese government’s actions are over, not least after tougher rules on competition in the tech sector and tighter data privacy restrictions were announced, but an interesting development has been moves by China’s tech leviathans to expand their corporate giving (to charity projects, etc). More wealth sharing is exactly what China authorities want to see. This suggests that future curbs may come through a softer approach.
Does all this make China un-investable? Certainly not but it does argue for more diversified exposure, less concentrated on big tech. The broader Chinese economy is currently slowing with concern around credit defaults encouraging the central bank and Government to begin an easing cycle. China’s ability to deliver its global political ambitions must be strongly linked to the health and wealth of the Chinese economy; a Japan-style, perma-bear market in Chinese equities won’t be welcomed.
Supported by conventional monetary and fiscal policies, the Chinese bond market is increasingly seen as a safe haven for global investors and the renminbi is displaying defensive characteristics. This year’s setback in Chinese stocks is beginning to create an attractive entry point especially relative to liquidity-fuelled, advanced economy equity markets.
There are reasons to be wary about investing in Xi’s China but the recent tech crackdown shouldn’t be one of them.
Stephen Jones is chief executive of Aegon Asset Management UK.