A regulatory reckoning
Across global equities, China’s market has been a notable underperformer in 2021. Through November, the MSCI China Index declined 19.1%. That’s been a big performance drag on the MSCI Emerging Markets Index—of which China is the biggest geographic component—which was down 4.1%.
A key driver of China's underperformance was a regulatory crackdown by its government, which asserted itself over the summer by seeking to rein in what it viewed as monopolistic excesses in several of the nation’s new economy industries. In the wake of several regulatory actions, China in August unveiled a five-year plan, setting out a framework for stricter control over the economy, including strengthened laws targeting monopolies and tightened controls in areas of strategic importance, including national security, technology, culture, and education.
China’s fast-growing internet service companies were among the firms targeted most directly by the recent restrictions. With this initial crackdown now in the past, and with the new antitrust rules now in place, we expect a clearer path ahead for internet service companies as they adapt to a new environment—one in which China’s regulatory standards are now more comparable with those in many developed markets. We believe that this reduced uncertainty could provide a tailwind and an eventual reacceleration in growth for such large Chinese companies as Meituan, a web-based food delivery and retail services company, and Tencent Holdings, a multinational technology conglomerate and vendor of video games and internet-related services.
Beyond industries targeted most directly by this crackdown, we maintain favorable views of selected Chinese consumer product companies, notably sportswear makers ANTA Sports Products, and Li Ning. We believe both companies are likely to enjoy improved brand perception in 2022, potentially putting them in position to take market share from global sportswear companies in the Chinese market. The Chinese government has voiced strong support to promote the mass-market sports industry, and the 2022 Winter Olympics, scheduled for February in Beijing, are also expected to boost consumer sentiment.
Policy reversals ahead?
We also expect to see a favorable shift in Chinese monetary policy in 2022. In 2021, China’s economy has been constrained by tightened monetary policy—notably in the property development sector—coupled with China’s zero-tolerance COVID-19 policies and strict public health rules. Taken together, these policies have led to subdued domestic consumer spending. This factor was a key reason why China reported that its annual economic growth in the third quarter of 2021 was just 4.9%, marking the slowest pace of GDP growth for the world’s second-largest economy since the third quarter of 2020, an earlier stage of the pandemic.
We view China’s central bank as having been ahead of the curve globally in 2021 in terms of tightening its monetary policy; in contrast, the United States and other major economies have only recently begun to move toward reining in accommodative policies that were implemented in response to the pandemic-induced economic shock of 2020. The People's Bank of China appears to us to have room to support economic demand in 2022 through targeted easing of selected monetary policies, which could provide further support for Chinese equities.
Potential risks for Chinese stocks
While we remain optimistic, a number of risks could present potential obstacles for any rebound in Chinese equities in 2022. COVID-19 and its variants—notably the recently emerged Omicron variant—pose public health and economic challenges across the globe. Even countries that manage to avoid significant outbreaks could find their economies hindered by supply chain issues and other problems that originate overseas. In addition, China’s property segment and its financials sector more broadly face risks stemming from the debt struggles of a major property development company, as liabilities were spread across hundreds of entities in China’s financial system. Persistent geopolitical risks relating to global trade, Taiwan, and other issues also could flare up in the coming year.
Will China’s stock market catch up to its share of world GDP?
Source: World Bank Group, MSCI. GDP data as of 12/31/20, market cap data as of 6/30/21.
Our positive long-term view
Despite these risks, we don’t believe they’re likely to offset the many positive catalysts that we see for selected Chinese equities and for China’s market more broadly entering 2022. We have a favorable view of China over the longer term, given China’s massive market potential, its ambition to move up the value chain in various industries, and the nation’s further integration into global markets. We believe that macro trends in China remain broadly favorable, although bouts of Chinese market volatility of the type we’ve seen in 2021 are likely to recur, and geopolitical flare-ups are to be expected.
Views are those of Terry (Zhaohuan) Tian, CFA, John A. Boselli, CFA, and Alvaro Llavero, of Wellington Management, are subject to change, and do not constitute investment advice or a recommendation regarding any specific product or security. This commentary is provided for informational purposes only and is not an endorsement of any security, mutual fund, sector, or index. John Hancock takes no responsibility for the accuracy of the content, and the views may not necessarily reflect those of John Hancock Investment Management.
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