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Extract from our "China's Fictional Growth" research paper, published 22nd November 2021.

Policies matter a great deal for China’s economic growth. Not only can policies shape the contour of a business cycle in China, but they can determine the trend growth rate over multiple cycles. The shift in Beijing’s focus from headline growth to economic growth, that more genuinely reflects the well-being of the populace (the difference between the two is ‘fictional growth’) came directly from President Xi in a speech delivered in 2017 and again in January 2021. This pivot in Beijing’s development goal should remain a central theme for investors in the coming years, we believe.

1. The property sector, as well as the export sector, will, as many already know, recede in importance as an engine of China’s economic growth, to be substituted by consumption and investment in technology. During this transition, there could be a temporary dip in potential growth, which should be tolerated by Beijing as long as urban job creation remains robust, which has indeed been the case so far this year.

2. The ‘growth betas’ (the growth elasticities of China’s trading partners relative to China’s economic growth) will vary depending on the countries in question. Germany’s presence in China might continue to thrive, while some emerging market (EM) countries may struggle to benefit from the rise of China.

3. As a key systemic risk, China’s total non-financial debt is 285 percent of GDP, broadly on par with that of some developed countries such as the US (286 percent), France (361 percent), and Japan (417 percent). We are less concerned about the ultimate resolution of this high leverage than some analysts are and believe that robust nominal GDP growth could erode China’s debt load over time. Though its deleveraging campaign may have come a bit late, at least China is confronting this systemic risk rather than continuing to promote leverage like many other developed countries.

4. Heading into 2022, we have an optimistic view on CNY assets: equities, bonds, and currency; we do not share the prevalent bearish outlook on China.

Bottom Line

The recent economic growth deceleration in China has been orchestrated by the policy makers. Far from a policy mistake that will lead to systemic financial breakages – as some pundits have suggested – we believe all of the recent developments have been consistent with the strategic and structural policy pivot planned for the second five-year term of President Xi. Delayed by Trump’s trade spat and then the Pandemic, the regulatory policies were introduced because Beijing thought, and still believes, the timing was ripe. We urge investors to consider this narrative of Beijing being in good control of a challenging situation and that the theme of seeking a higher quality economic model will dominate policies and dictate economic growth for the coming years. This clearly is not the policy path of least resistance, but a modest and temporary decline in the headline GDP growth rate which does not trouble us. If anything, we believe Beijing’s policies are superior to those pursued in the Developed West, where leverage is encouraged to rise indefinitely. For 2022, we have a favourable view on the Chinese bonds, Chinese equities, and the Chinese currency.

Extract from "China's Fictional Growth", published 22nd November 2021.

Sections included within this report are:

  • Xi’s thinking on economic development
  • ‘Fictional growth’
  • Systemic risks: China’s high levels of leverage and the property sector
  • China has taken on a lot of debt, but so has the rest of the world
  • K-shaped sectoral trajectories in China
  • Wealth re-allocation from properties to public markets
  • R versus G
  • Divergent ‘growth betas’
  • Our outlook of China’s growth and asset prices

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Source: Percent of GDP figures from BIS {link}


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Views accurate as at the time of publication. Opinions expressed by the authors are their own and do not necessarily reflect those of Eurizon SLJ Capital Limited, Eurizon Capital SGR or the Intesa Sanpaolo Group.
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