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The Big Conversation

Episode 117: China’s growth transformation

This week  LSEG’s Garett Lim looks at a number of indicators that suggest that China may be embarking on an era of more sustainable growth. Last year proved to be a challenging one for Chinese equities, with growth concerns around Common Prosperity weighing on investor sentiment. But are we beginning to see signs of an economic transformation towards more sustainable growth in 2022? In the Chatter Garett speaks to Nicole Chen, Refinitiv’s Head of China, about the macro-outlook for the region and the transition towards more sustainable growth. 

  • China's Common Prosperity theme dominated the headlines for 2021. Investors are worried about impacts on growth numbers, and the stock market reflected these concerns with a flat performance for the year. Numerous sectors were targeted last year, notably the property and the tech sector. But are we beginning to see signs of an economy which is transforming itself to grow more sustainably? In this week's episode of The Big Conversation, we speak to Nicole Chen, Refinitiv's Head of China, on the macro-outlook for China. Nicole will discuss the changes in the RMB market, the evolution of the greater bay area, and the growing influence of this special economic zone for future growth. We also discuss the importance of the carbon market for China, and look at some interesting foreign investment trends that could change China's landscape in the years to come.

    Hi Nicole, so glad to speak with you today.

    Hello, Garett, thank you for having me here today.

    Could you give us your view of China's economic outlook for 2022? What does Common Prosperity mean to you, and you could you also elaborate on the regulation of disorderly capital expansion?

    Actually, to determine China’s economic growth outlook in 2022, let’s take a look at the greater context and big picture first. The COVID-19 pandemic had continued to impact the world in 2021 with new variants making global market waters even choppier. In response, China’s Central Economic Work conference, held towards the end of last year, provided a plan for 2022 to stabilize the economy by ensuring fiscal spending intensity, accelerating spending progress, and carrying out infrastructure investment ahead of schedule.

    While China’s GDP did grow by 8.1% in 2021, the second half either saw the economy flagging, with growth falling to between 4% to 5% in the second half of the year, a result of resurgent local COVID-19 cases and exposure of deep risks in the real estate sector.

    Notably, the PBOC let several rates fall, the first changes since April 2020. On top of that, the pace of regulation of the PBOC has changed to become more aggressive and proactive. The PBOC’s easing policy at the beginning of the year has not only maintained reasonable liquidity in the banking system, but also allowed it to match spending in infrastructure construction, while increasing investment in areas such as pollution reduction and new energy, which not only expands short-term demand but also enhances long-term momentum and boosts social consumption.

    As for the regulation part, we’ve all heard of China’s new emphasis towards Common Prosperity policy and the associated regulation of disorderly capital expansion. During the Central Economic Work Conference, I mentioned earlier, five long-term priorities related to common prosperity, capital, supply security, risk mitigation, and dual carbon goals had policy guidance clarified. A traffic light system for capital, in terms of beneficial versus harmful capital was proposed, promoting the former while excising the latter, all with an emphasis on legal regulation.

    The new regulation of the Internet platform economy is the most visible example.  Over the past decade, online celebrity live-streaming, education, training, have all created countless wealthy, upstart individuals and companies. This will instead give way to hard and core technology innovation, such as new energy, autonomous driving, and chip manufacturing, all under the New Era theme of Common Prosperity.

    Globally, there has been a huge focus on sustainable finance. How is China progressing in this area?

    Obviously, similar with the global market, sustainable finance also became one of the mainstreams in the China market as well. China’s dual carbon goals have accelerated the development of green and sustainable finance since 2021, marking significant progress in green credit, green bonds, green insurance, and other related businesses. For example, data shows that as of September 2021, green loans from Chinese financial institutions stood at RMB14.8 trillion, up 27.9% from the past year.  Market-based carbon finance tools such as carbon emission revenue right loans and carbon repurchase are being launched one after another, leading to real staying power.

    From a corporate perspective, LSEG has also been driving this progress through the Future of Sustainable Data Alliance and by partnering with organizations such as the USSB to better improve efficiency in sustainable investments. Refinitiv itself is also an active provider of high quality ESG data to assist decision makers best decide how to drive an efficient allocation of capital towards green and sustainable finance in China. Products like the FTSE Russell Sustainable Climate Development Index is helping promote cross-border investment for sustainable Chinese companies. All of these initiatives drive the LSEG team towards the global green revolution through partnerships with Chinese regulators, companies, and investors.

    There's been a lot of discussion on China's national carbon market. Will 2022 be the year where the carbon market truly opens up?

    Well, as for the carbon market in China, 2021 marked the opening of China’s national carbon market. And while it has found significant success, 2022 will be the year for the national carbon market to take off. New legislation, new compliance period quota allocation methods need to be filled this year and a specific timetable for more industries to be included in the market needs to be established.

    Apart from that, despite competition heating up between China and the US in the fields of trade, tech, and finance, international investment institutions are still stepping up their pace of investment in China, setting up branches to allocate RMB assets. In addition to Chinese USD bonds, RMB assets are becoming increasingly attractive to overseas investors. According to the PBOC, the volume of Chinese bonds held by international institutions reached RMB 4 trillion in 2021, a 23% increase from the end of 2020.

    Heading into 2022, the Chinese bond market, which has just been included in the FTSE Russell WGBI Index, will also drive the allocation demand by global bond funds, with China becoming the market of choice for global financial capital to enhance returns after the tightening of the quantitative easing policy in the US.

    Do you expect to see more secondary listings in Hong Kong? Also, what is your outlook for the renminbi in the Year of the Tiger?

    As US-Chinese regulatory tensions continue to accelerate, Chinese new economy companies are stuck between the two compliance regimes, resulting in many companies such as Didi exiting from the US to listing in Hong Kong.

    It is expected that more and more Chinese US-listed companies will accelerate their listing in Hong Kong in 2022 and in the foreseeable future. The Hang Seng Index announced that it aims to increase the number of constituent stocks to 80, from the current 64, by mid-2022, with the aim of a final fixed number of 100 eventually.

    For the RMB, most institutions expect the RMB exchange rate to fluctuate from 6.3 to 6.5 in the Year of the Tiger. The PBOC has raised the four-week exchange reserve requirement ratio twice in 2021, expressing unease about the rapid appreciation of the yuan. Regulators have also tried to stabilize market expectations via outflows and regulating market behaviour.

    The narrowing of key gaps this year will expose the yuan to more depreciation risks due to a time lag between the start of the pandemic and the recovery of the Chinese and American economies. In 2022, the gap in GDP growth and the US will narrow again as the global economy slowly recovers from the pandemic. According to Reuters, the US economy will grow 3.9% this year and China at 5.2%, putting pressure on the RMB to depreciate against the dollar.

    Furthermore, the global supply chain crisis brought about by the pandemic gave China an advantage in exports in 2020 and 2021, and China benefited from an impressive export growth rate during this period.

    As the situation of pandemic gradually improves around the world, major manufacturing bases in Asia, such as Indonesia, Thailand, and Malaysia, as well as major raw material production countries in South America and the Middle East, will gradually resume production capacity, potentially reducing China’s advantage in export growth rates.