Chinese stocks had a rough 2021. But with China beginning to cut its interest rates, while the West takes the opposite stance, Chinese equities may be poised for a turnaround in 2022. Haining Zha, Portfolio Manager, TD Asset Management, weighs in.
- As investors await the beginning of an interest rate tightening cycle, China has moved in the opposite direction towards a looser monetary policy to help boost their economy. Here to help us sort through what that means and perhaps some opportunities, Haining Zha. He's Vice President and Portfolio Manager with TDS Management. Haining, nice to see you, as always. I'm just going to jump right in.
China is looking at cutting its lending rates while the West is looking at tightening its interest rates. Can you just tell us-- give us a bit of background here. What's happening with China? What are the headwinds it's facing right now?
- Right. I think the two main headwinds for China is, number one, the real estate sector. You know, the Evergrande default is still a drag on the real estate sector. So this year, the housing start probably will be down low double digit. So yeah, it will be a material drag for the whole economy. It probably will take another six months to gain some clarity on the restructuring, the debt restructuring solution.
And the second headwind would be on COVID, because right now, there is still a COVID gap between China and the most of developed economy. So benefiting from the zero COVID policy, the majority of the Chinese population kind of a dodged the previous several breakout outbreaks of COVID. But when you're looking at developed economy, most of the population have already contracted some version of COVID, mostly Omicron, and/or they have taken mRNA vaccines. So going forward, as the world continue to normalize, eventually it is going to converge. And if there are more frequent breakout in China, then it will be a drag to the economy, as well.
- Hmm, so when you take a look at those two headwinds and you look at, perhaps, what the central bank might be doing with loosening to accommodate those headwinds, what's your longer-term-- or I guess, near-term and longer-term outlook for China?
- Right. So near-term, there will be-- no question-- some downward pressure on economic growth. But longer-term, everything should be fine. As soon as the world converges, and when the monetary policy work its magic, I think the Chinese economic growth will converge to its long-term potential, which is somewhere between 4% to 5%.
- Haining, let's take a look, though, at the equities for just a moment, because of course, even though the economy may be getting back to its longer-term potential, Chinese equities have underperformed US markets in 2021. Although, US markets are doing their best to catch up to that underperformance, quite frankly, in 2022. But you are seeing more opportunities with Chinese equities right now. How come?
- Right. Indeed, we are more optimistic. And because the big picture is the world is seeing very divergent monetary policy cycle, on one hand, most of the developed economy, they are in the tightening mode. And that tightening cycle probably will be very steep. But in the meantime, the PBOC is gradually into the easing mode.
For example, in December, they cut reserve requirement ratio by 50 basis points. And then in January, they cut some key rates, for example, MLF and the repo rate and the loan prime rate. But they are still not in the full-blown easing mode as yet. So there will be more to go.
And why does it all matter is because whenever you have tightening monetary policy, it will pressure the valuation. Whenever you have easing policy, it will support the valuation. So we are more optimistic. And also on the earnings side, whenever the monetary policy is in the tightening mode, chances are the economy is experiencing some form of inflation which will eat into the margin.
And also, when the central bank continue to tighten, then eventually, that economy will lose that momentum. But on the vice versa, if you are in the easing mode, chances are you are already experiencing some lackluster growth number and very low earnings expectation. So eventually, monetary policy support will work its magic.
- Monetary policy support, of course, has been one of the-- I mean, monetary policy has been the biggest driver for all equity markets for a number of years now. But on top of that, I know with China, I think last year, we did see-- and we've spoken about it-- cracked down on a few different industries-- internet, education, technology. And we saw the result of that sending the US listed stocks of those companies tumbling. Has the crackdown eased up? Or has it normalized in a way that it's been baked into those prices, right, that people can predict what's happening?
- Right. Unfortunately, news still come in from time to time. For example, last week, the regulator just asked state-owned firms to further investigate their links and investment with Alibaba's Ant Group. And also, last week, another company, Meituan, received a regulatory guidance to lower their fees for small- and medium-sized merchants. So I think right now, the investors' confidence is very much shaken.
But when we look at the price, it's already pricing in a lot. And if we take a forward-looking view and ask ourselves, in the next 12 months, what with the regulatory intensity, is it more likely to dial up or dial down, I think our answer will be the latter.
- Hmm, all right. So if we take a look, we've got a couple of headwinds, loosening monetary policy. The regulatory piece seems to be coming down a bit. For an investor who's saying, OK, I'd like to start looking at maybe getting some exposure to Chinese equities, what are some of the ways to do it?
- Right. I think the investor can get exposure through active or passive products. On the active side, we have TD China Income and Growth fund in our asset allocation portfolios. They are active products managed by a group of portfolio managers and analysts on the ground.
And on the passive side, investor also have a lot to choose. They have many options. For example, the ASHR, which tracks the mainland Asia benchmark. And they have FXI, which tracks shares listed in Hong Kong market, which have a healthy balance between value and growth companies. And lastly, you also have MCHI, which track MSCI main benchmark, which is more growth tilted.
- Haining, always a pleasure. Thanks so much.
- Thanks for having me.