Show Transcript
Major indicators showed China’s economy continues to recover from COVID-19, backed by Chinese stock markets outperforming the S&P 500. But with growing tensions with the U.S. and a brewing tech cold war between the two superpowers, what’s the investment outlook for Chinese equities? Kim Parlee speaks with Haining Zha, VP, TD Asset Management.
Print Transcript
- China's economy, of course, was the first to be hit by COVID-19. It is also one of the first economies to bounce back. But with US tensions heating up, will China's economy continue to grow? And what could that mean for our economy? Haining Zha is vice president at TD Asset Management, here to shed some light on that very subject. Haining, good to see you. I wondered if you could just start off by telling us how you would characterize China's recovery right now.
- I would say the Chinese economy right now is probably one of the strongest economies in the world, I think because the government was able to control the spread of the virus much more effectively so the economy could reopen much faster. And if there is any glaring weakness, and I think there are basically two areas-- one is the weak external demand, meaning the consumption demand from the developed economies such as US and Europe, because they have been hit by COVID-19 much harder, and second areas of weakness is probably consumption, because COVID-19 caused significant disruption to the economy so people lose-- temporarily lose part of their income, so they will be much more cautious on spending.
- Haining, can we dig in a bit on the domestic consumption numbers? Because it's interesting-- I mean, if we look at the import numbers that have come out recently from China, they look weaker. So maybe just tell us a bit more why we're not seeing that recovery in domestic consumption that we're seeing other places like the US and Europe.
- It is because the Chinese government hasn't taken as dramatic measure as the US government and the European government, because it is not directly giving away checks to the household. That's why you are seeing a bit of weakness. But if you compare it to three months ago, three months, ago retail sales was down 15%, 16% year over year. But now, it's improving to down only 1% year over year. So that shows the Chinese economy is definitely on a the correct road of recovery.
- It sounds like you're obviously watching retail sales as a good gauge for what's happening, but any other metrics you're watching just to show that there is a recovery happening?
- Right. I think the number one and probably the most leading measure we watch is the Purchasing Manager Index. If you look at that measure, the PMI index has been up above 50 and keep increasing for the last three months in a row. That is a very good sign. And if you look at particular the New Orders Index, it has the same pattern, which shows that the aggregate demand in the near future will be very strong.
- This is all happening, of course-- you've got a pandemic going on, now you've got a technology cold war, basically, erupting between the United States and China. Can you just give me a sense of the significance of that from an economic standpoint, from a market standpoint-- where you see this going?
- Right. It is certainly very significant, but we are not surprised by it. Even a year ago when the trade war was still on, it was already market consensus that trade war could settle, but tech war would continue. And considering this is an election year, we certainly expect the volatility to continue before the election.
But we are not terribly worried about it for two reasons. Number one, the election is only three months away, and Biden is leading the poll. And if he wins the election, we think the risk in tech war and basically the geopolitical risk would moderate immediately, as he has already made it clear that if he wins election, he will eliminate the tariff to benefit the US household, which would be very market friendly. And number two reason is that even when the Trump administration still keeps sending out executive orders, which is very harmful to the US-China relationship, we don't think the scope of that executive order will be very wide or drastic. Otherwise, it will hurt US companies and his voter base.
- As for the current administration in the United States right now, we know that they reached a phase one agreement with China. Those talks, I think, have been postponed indefinitely at this point. Do you think the deal is going to even remain intact?
- Sure. Yeah. Just to give you a bit of context-- according to the phase one trade deal, China will buy $200 billion more goods on top of 2017 amount. So basically in 2020, they will buy $75 billion more, and in 2021, they will buy $125 billion more. We are already 2/3 into 2020, but we are only about one-third of the target.
So on the surface, this looks pretty bad. But keep in mind that 2020 is a highly unusual year because of COVID-19. And COVID-19 caused significant disruption to both the Chinese and the US economy. So if you account for that impact and adjust that number, the current progress is more than 50%. And in particular, if you look at the seasonal pattern of import and export activity, which is typically heavier in Q3 and Q4, we think that number isn't as bad as people think.
- So net net, Haining, it sounds as though you see there's opportunity right now in terms of what you're seeing in China.
- Yes, definitely. That's why within the TD Asset Allocation Solution, we are adding more Chinese exposure through the TD China Income and Growth Fund and some Chinese ETFs. If you look at the Chinese market performance year to date, the CSI 300, which is the main benchmark of Chinese equity, is giving a year to date return around 15%, outperforming the S&P 500, which is year to date 5%.
- Haining, great to have you with us. Thanks so much for joining us.
- Thank you for having me.
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- I would say the Chinese economy right now is probably one of the strongest economies in the world, I think because the government was able to control the spread of the virus much more effectively so the economy could reopen much faster. And if there is any glaring weakness, and I think there are basically two areas-- one is the weak external demand, meaning the consumption demand from the developed economies such as US and Europe, because they have been hit by COVID-19 much harder, and second areas of weakness is probably consumption, because COVID-19 caused significant disruption to the economy so people lose-- temporarily lose part of their income, so they will be much more cautious on spending.
- Haining, can we dig in a bit on the domestic consumption numbers? Because it's interesting-- I mean, if we look at the import numbers that have come out recently from China, they look weaker. So maybe just tell us a bit more why we're not seeing that recovery in domestic consumption that we're seeing other places like the US and Europe.
- It is because the Chinese government hasn't taken as dramatic measure as the US government and the European government, because it is not directly giving away checks to the household. That's why you are seeing a bit of weakness. But if you compare it to three months ago, three months, ago retail sales was down 15%, 16% year over year. But now, it's improving to down only 1% year over year. So that shows the Chinese economy is definitely on a the correct road of recovery.
- It sounds like you're obviously watching retail sales as a good gauge for what's happening, but any other metrics you're watching just to show that there is a recovery happening?
- Right. I think the number one and probably the most leading measure we watch is the Purchasing Manager Index. If you look at that measure, the PMI index has been up above 50 and keep increasing for the last three months in a row. That is a very good sign. And if you look at particular the New Orders Index, it has the same pattern, which shows that the aggregate demand in the near future will be very strong.
- This is all happening, of course-- you've got a pandemic going on, now you've got a technology cold war, basically, erupting between the United States and China. Can you just give me a sense of the significance of that from an economic standpoint, from a market standpoint-- where you see this going?
- Right. It is certainly very significant, but we are not surprised by it. Even a year ago when the trade war was still on, it was already market consensus that trade war could settle, but tech war would continue. And considering this is an election year, we certainly expect the volatility to continue before the election.
But we are not terribly worried about it for two reasons. Number one, the election is only three months away, and Biden is leading the poll. And if he wins the election, we think the risk in tech war and basically the geopolitical risk would moderate immediately, as he has already made it clear that if he wins election, he will eliminate the tariff to benefit the US household, which would be very market friendly. And number two reason is that even when the Trump administration still keeps sending out executive orders, which is very harmful to the US-China relationship, we don't think the scope of that executive order will be very wide or drastic. Otherwise, it will hurt US companies and his voter base.
- As for the current administration in the United States right now, we know that they reached a phase one agreement with China. Those talks, I think, have been postponed indefinitely at this point. Do you think the deal is going to even remain intact?
- Sure. Yeah. Just to give you a bit of context-- according to the phase one trade deal, China will buy $200 billion more goods on top of 2017 amount. So basically in 2020, they will buy $75 billion more, and in 2021, they will buy $125 billion more. We are already 2/3 into 2020, but we are only about one-third of the target.
So on the surface, this looks pretty bad. But keep in mind that 2020 is a highly unusual year because of COVID-19. And COVID-19 caused significant disruption to both the Chinese and the US economy. So if you account for that impact and adjust that number, the current progress is more than 50%. And in particular, if you look at the seasonal pattern of import and export activity, which is typically heavier in Q3 and Q4, we think that number isn't as bad as people think.
- So net net, Haining, it sounds as though you see there's opportunity right now in terms of what you're seeing in China.
- Yes, definitely. That's why within the TD Asset Allocation Solution, we are adding more Chinese exposure through the TD China Income and Growth Fund and some Chinese ETFs. If you look at the Chinese market performance year to date, the CSI 300, which is the main benchmark of Chinese equity, is giving a year to date return around 15%, outperforming the S&P 500, which is year to date 5%.
- Haining, great to have you with us. Thanks so much for joining us.
- Thank you for having me.
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