Opinion: China’s Economy Is on Its Way Back to Normal

Following what has been an indisputably challenging year, the impact of Covid-19 continues to be felt on the global economy. But it’s heartening to note that the recovery has begun, aided in part by the rapid development and distribution of several vaccines around the world.

In China, the world’s second-largest economy, we are seeing a range of macroeconomic and policy indicators that point to a return to normalcy on most if not all fronts. Here, we take a look at how these trends will impact Chinese markets and what they mean to investors.

Normalizing macro indicators

We continue to see strong momentum for China's economy in the first quarter of 2021 and beyond. This view is corroborated by a huge rebound in the Purchasing Managers Index, which shows the country’s manufacturing sector is on the mend. We also see a strong recovery in retail sales and a pleasantly surprising surge in exports. China’s exports, which have been surprisingly resilient amid the global recession, will receive a further boost from a global economic recovery that is expected following the successful administration of vaccines.

Further, key indicators updated by the Credit Suisse China Quantitative Insight team in November 2020 suggest that household disposable income remained stable in line with the National Bureau of Statistics’ consumer confidence index, an additional sign of a gradual normalizing of bellwether macro indicators.

In response to these developments, the Credit Suisse economics team has revised its 2021 China GDP forecast up to 7.1% from 5.6%.

Normalizing policies

On the policy front, we expect things to revert to normal, including a gradual tapering of government stimulus. As a result, deleveraging and risk management will become major themes.

China’s macro easing in 2020, though relatively disciplined, quickly drove up the macro leverage ratio by 25 percentage points to a record 270.1%. Going forward, fiscal policy is expected to normalize with no major stimulus forthcoming, which should help roll back the fiscal deficit to 3%. At a time when market rates are facing upward pressure along with currency appreciation, prudent monetary policies will help slow the growth of credit and total social financing so they’re synced with economic expansion without risking a domestic asset bubble.

Consumption will be a major driver of economic growth in the coming years, in line with government policy, with e-commerce helping to enhance retail penetration. Additionally, infrastructure investment is set to gradually improve given the growing focus on building new infrastructure. However, the property investment space is unlikely to be exciting amid a tight policy environment that emphasizes deleveraging.

On the other hand, China’s senior leaders have continued to implement a series of regulatory reforms in the past two years despite uncertainties, such as growing restrictions on Chinese companies’ U.S. listings. These reforms have achieved remarkable results in transforming China’s capital markets and more are awaited in what will be a multi-year theme, promising a larger role in the market’s future development.

Normalizing market performance

In response to these developments, we anticipate that investment styles will rotate from a focus on growth to emphasize value creation — a trend that has already been set in motion with the development of promising vaccines.

The valuation of Chinese equities has expanded to a less undemanding level after its rally. And given that China is already on track for recovery, we will likely see a less volatile shift between styles and sectors. Looking forward, we expect more upside for Chinese equities, including A-shares, despite regulatory and policy risks.

In view of a further recovery in 2021, albeit one with rising regulatory and stimulus exit risks, we believe more old economy sectors will benefit from a late-cycle recovery, particularly industrials, consumer discretionary sectors, information technology and financials.

Edmond Huang is head of China research at Credit Suisse.

The views and opinions expressed in this opinion section are those of the authors and do not necessarily reflect the editorial positions of Caixin Media.

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