Experts in the UK, Hong Kong, Singapore and China discuss why ESG is a hurdle to overcome when considering China, the rewards for active investing and what chinese government endorsement can bring. Chaired by Romil Patel.
Padmesh Shukla (Head of investments, TFL Pension Fund)
Nikesh Patel (Head of investment strategy – UK, Kempen Capital Management)
Dong Wang (Chief executive officer, HSBC Jintrust)
Donald Amstad (Global head of client growth and China investment specialist, Aberdeen Standard Investments (ASI)
Simon Kellaway (Regional head of securities services for Greater China and North Asia, Standard Chartered)
Funds Europe – China headed into the Year of the Ox with economic growth already back at pre-crisis levels. Figures from Q4 2020 show GDP expanded 6.5% in the last three months of the year, making it the only major economy to experience growth last year. Is another bull run possible and which areas of the market offer pent-up recovery potential?
Dong Wang, HSBC Jintrust – I’m Chinese and I’m based in Shanghai. In China the pandemic is behind us and 2021 is about normalisation back to the pre-pandemic level. Based on the in-house estimates, we are looking at 8% to 9% GDP growth for 2021, so that’s the general normalisation because of the low base effect in 2020. In terms of the surprising target of 6% in the National People’s Congress (NPC), what we see is an anchoring of the overall expectation of the market, it’s a lowball number – everybody believes because of the economic recovery it should not be a hard target, but signalling in terms of what China is trying to do overall, which is to look at the long-term. 2021 will be the first year of the 14th five-year plan, and the key message is more high-quality growth rather than the quantitative-driven growth. That’s where they moved all the GDP targets in the 14th five-year plan, but for the first year in 2021, the target is 6%. That has anchored the overall tone that Beijing is not trying to get everybody too excited.
What we really want to achieve is the quality of the growth, so that it’s more equal and there’s fair sharing of economic growth amongst the whole population. They want to look at the long-term growth trend in terms of the consumption-driven domestic growth, as well as the more innovation-driven technology and the high-end manufacturing. In terms of overall supportive measures, we will be keener on the long-term sustainability of lots of initiatives in China.
Padmesh Shukla, TFL Pension Fund – Pension funds have liabilities that run into decades. Imagine an 18-year-old joining a pension scheme today who could expect to live up to the age of 100 – we tend to think long-term simply for that reason alone. When it comes to China, I am not losing much sleep about whether the growth is going to be 6%, 5%, 4% or even 10%, because the growth will be whatever it will be. It is impossible to predict these numbers with precision and you would find enough noise in the forecasting track record of even eminent global bodies such as the IMF to make it a useful investment metric. In our view, economic growth and stock market return sometimes can actually have no relationship. From our perspective, it’s less about immediate growth numbers and more about almost a secular economic story that we are actually after when it comes to China, but also with a realisation that there are risks attached to that story, so it is not a case of unbridled optimism.
Funds Europe – China was the only major economy to notch up any growth at all last year, so is it a signal that leaders want to focus more on quality growth rather than the speed of activity?
Donald Amstad, Aberdeen Standard Investments (ASI) – One of the lessons that we take from 2020 is that one of the preconditions to have economic growth in any country is the need to have a competent government. If Covid-19 was like an Olympic Games in terms of being a test of government competence, then I think the Chinese government would be certainly in the finals competing for a place on the podium, together with a number of other east Asian governments, and perhaps the likes of New Zealand, Iceland or Finland. It seems that there are two criteria for having countries that did well out of Covid – one is to be in east Asia, and the second is to have a woman as a leader. China has done rather well in that respect and certain Western countries have done incredibly poorly. When you then add on the fantastic infrastructure that China has got, the foundations are laid for years of growth.
Because China had the political will and the political infrastructure to deal with Covid, shutting down the city of Wuhan – a city of 10 million people – was not pleasant, but I’m sure that people across China were very pleased that their families were protected because of that shutdown. Ten million people paid the price in terms of being locked down for 75 days, but it meant that more than a billion people had minimal interference in their lives. It’s in stark contrast to this ability of many Western governments, I would say, to try and enforce a lockdown.
The result of all this is that policy, interest rates and fiscal policy in China are normal, unlike policy in many parts of the Western world, which one can only describe as abnormal. The key word for the leadership in China is stability. They crave stability more than anything else, and they’ve got it. The key thing about China is, as Padmesh says, it’s not about whether growth is going to be 6% or 10% this year, it’s what are the risks around that? The risks around that are very low because if growth were to tail off for some reason, they’ve got so many levers at their disposal to try and get the economy back on track.
Nikesh Patel, Kempen Capital Management – GDP is a number that doesn’t actually matter from a portfolio context, it’s not something we monitor obsessively – the link between GDP and investment returns is thin to non-existent. Most institutional asset owners in the UK, probably also true of those in the EU and the US, are so underexposed to China that strong performance in China – whether it’s a bull run or strong GDP numbers – doesn’t actually register meaningfully at a total portfolio level. GDP expectations for 2021 are a very short-term thing that is irrelevant to the long-term strategic case for China, which is a decade and multi-decade-long investment opportunity. I know GDP is a number that economists love to focus on, but I’m almost saying: “I don’t care.”
Simon Kellaway, Standard Chartered – Standard Chartered Bank’s research team expects that GDP is probably going to accelerate to about 8% for China in 2021. This compares favourably to the 6% target recently published by the NPC, but I would look at the latter as more of a ‘normalisation target’, which gives China room to move towards a lower, yet more sustainable in the long-term, annual growth rate that reflect a focus on the quality of growth rather than simply pace. The fourth quarter 2020 GDP data underlined a fast, but fairly uneven, growth recovery driven by strong exports of pandemic-related goods and credit-fuelled car and housing sales. On the flip side, retail sales, catering, accommodation and air travel all remain subdued reflecting the medium-term impact of Covid-19 brakes on income and behaviour. An increasing focus on the quality of Chinese growth will also enable the rest of the world to catch up: China’s share of global exports is likely to normalise throughout 2021 as overseas supply chains come back online again after lockdown restrictions, international trade flows to re-emerge and aggregate production bounces back to be pre-Covid levels.
We expect that trade and economic activity data for the first quarter of 2021 will show a sharp rebound, probably around 30% year-on-year, when compared to the first quarter 2020, when Covid lockdown measures led to a sharp fall in activity. In general, in terms of China’s GDP, we anticipate that by the end of the next five-year plan, it will rise to about 20% of world GDP from 18% currently, driven primarily by consumer, trade and investment-related goods. This reflects the focus on steady, rather than continued explosive growth that the Chinese Communist Party aspires to.