Chief economist forecast

China: the Middle Kingdom still offers opportunities

With 5% of the world economy, China is the subject to watch. (Photo: Shutterstock)

With 5% of the world economy, China is the subject to watch. (Photo: Shutterstock)

Inflation, the pandemic, geopolitics, sustainable finance... Four chief economists of the financial centre sat down around a table, at the invitation of Delano’s sister publication Paperjam, and shared their prospective analysis for the year 2022.

Olivier Goemans, portfolio manager, advisory coordinator and head of sustainable investments at BIL, Jean-François Jacquet, head of investments at Quintet Private Bank, Philippe Ledent, expert economist at ING Belux, and Alexandre Gauthy, macro-economist and head of investments at Degroof Petercam Luxembourg, give us their analysis for 2022 and try to answer the big question: what prospects does China offer for the world’s economies and for investors?

What is left of China? An impertinent question, but one that is justified in a context where China is going through a real estate crisis that could lead to a social crisis. China is being built politically thanks to the support of the middle class. A middle class that has developed strongly in recent years, taking advantage of the dynamism of the economy. But in a country where 90% of the net wealth of households is in real estate, a crash could well call into question a social pact based on the exchange of prosperity and civil obedience.

For Jacquet, even if the performance of the Chinese market was very poor in 2021, “one cannot not invest in China today”. He attributes this poor performance to the ongoing rebalancing. “The objective of the government is no longer to ensure double-digit growth, high but short-term oriented growth, but to put in place a more stable, inclusive growth dynamic that takes into account long-term climate change objectives.” This translates into a rebalancing in several segments: domestic demand takes precedence over exports, services over manufacturing and the consumer over investment.

A rebalancing that may have surprised investors. Investors who have everything to gain from the parallel transformation of the regulatory environment “which is becoming quite similar to what we have in the Western world,” says Jacquet.

For the head of investments at Quintet Private Bank, we must not lose sight of the fact that we are talking about an economy that will soon become the world’s leading economy and which dominates Asia, a very dynamic zone too. “The bumps we have seen this year are due to these rebalances. Real estate is clearly an area of concern, which has certainly explained the way the Chinese market has reacted this year. But the growth prospects are there nonetheless.”

Nor is there any question for Goemans of excluding China from the portfolios right now. “To exclude it by default is absurd”. He continues: “Today, China is cheaper and offers many opportunities. Now, investing there requires being connected to the flow of information and having a certain proximity to that market. We have an exposure to China that we have struggled to carry during this complicated year, but we have kept it and we are wondering whether it is worth increasing.”

Property risk

For Gauthy, China’s main current problem is that it has built more housing than it needs. 2021 will be the first year in which the Chinese population will fall, notes the economist, for whom, in the long term, China’s demographic problems will worsen in a context of high municipal debt.

“The country will have to find another engine of growth than investment in infrastructure and housing, two sectors that were the lever of past stimulus programmes and can no longer be.” The alternative, according to Gauthy, is investment in green energy and new technologies. To avoid the “middle income trap” and reach the status of a developed economy, the Chinese economy will have to move upmarket and turn to services and innovation.

He believes that as the catch-up effect that boosted international trade during the post-pandemic reopening of the economies fades, Chinese growth will decline, before stabilising during 2022.

As for the real estate crisis, “while for the first time we are seeing house prices fall in China”, he believes that the government will act to avoid a deflation in real estate prices, without reviving the sector and opening the credit floodgates. “A difficult and delicate balancing act.”

But not impossible, according to Goemans, who recalls that the Chinese economy is a planned economy. While agreeing that this is a sector that will have to be kept under review in 2022.

The question of the limits of globalisation

For Ledent, if Beijing is seeking to make domestic consumption its new engine of growth--”the Silk Roads project shows that, in spite of everything, they want to continue to benefit from the dynamics of international trade, both from a geopolitical and a commercial point of view”--we must first and foremost ask ourselves whether the world is going to continue to move in the direction of globalisation. “We are in a world of rising tensions and I sometimes wonder if the theme of 2022 might not ultimately be geopolitics.”

“Are we still on a trajectory of the world economy today that is moving towards greater globalisation and increased trade,” he asks. He acknowledges that we are dependent on this model based on global trade, as was seen during the pandemic when masks were in short supply and will continue to be so for the supply of raw materials.

“In a world where geopolitical tensions are increasing and the concept of sovereignty is now part of all political discourse, what can this achieve?”

This story was first published in French on Paperjam. It has been translated and edited for Delano.