Summary

Josh Sheng began by illustrating an increasing trend in global investment which has led to RMB assets held by international institutions and individuals increasing more than 8 times for both bonds and equities in the past 8 years. However, the emergence of market panic in response to a series of policy changes in the first half of 2021 has led to the growth dropping very close to zero. These changes vary from sector to different industries. Policy changes can be seen in education with what Josh refers to as education “double reduction”. Other industries impacted include real estate, with the implementation of stricter property price controls. Big conglomerate companies such as Tencent and Alibaba are also facing challenges due to government policies regarding internet entertainment monopolies. Finally, the healthcare industry’s centralised procurement policy change has led to drug producers having to sometimes sell at 10% of the original price.

Josh then went on to outline how these policies are in response to solve China’s population problem which will impact economic growth for the next 10 to 20 years. More specifically, China’s dropping trend regarding new-born children. In the short term from 1 to 2 years, the government plans to reduce its people’s expenses on education, healthcare, and property in order to improve willingness to have more children. In doing so they aim to directly tackle and change the structure of its currently aging population. In the midterm – 3 to 5 years, China plans to use national capitalism to support the development in high-tech and advanced manufacturing to help realise its independence from the Western world. In the long-term – 10-year period, the Chinese government is looking to minimise the negative impact of the aging population. To assist in revitalising the economy they want to implement an engineer bonus, an increase in well-educated people such as university graduates, postgraduates, doctors, etc. As a result, there will be more workers within the high-tech and advanced manufacturing industries whose development would have been supported in the midterm. Where real estate was the growth engine for the Chinese economy for the last 10 years, this is predicted to be taken by the next growth engine, the digital economy; high-tech industries, etc. Also, with the Chinese economy becoming more automated, the automation of various companies will drive CAPEX in those industries. This means an increase in buying robots to improve performance in business and financial. In a world with fewer working-age people, automation counters and helps solve the aging population problem whilst keeping economic growth at a reasonable level.

As it stands as of July 2021, China is in a slowdown quadrant meaning that the level of growth is still high but is slowing down. Josh points out that growth is going in a clockwise direction so it is likely for the rest of 2021 China will experience further slowdown, but only a very mild situation. One of the biggest impacts on the Chinese economy is COVID-19 with their zero COVID approach leading to strict quarantines, mass testing, and travel restrictions. With new variants in the viruses such as the Delta variant, it has caused difficulty in the process of struggling to maintain the economy at a reasonable growth rate whilst keeping people safe from COVID. The slowdown in the economy is predicted to possibly continue into early 2022.

Josh highlights how the CSI 500 has a much stronger profit growth rebound than the CSI 300. This can be put down to their differing structures. CSI 300 has a lot more companies in the financial sectors whereas CSI-500 has more in the high-tech, manufacturing, and chemical companies. This is due to CAPEX, robot automation, and the trend of inflation. The prices of commodities skyrocketing in the second half of 2020 and even 2021 has additionally improved and helped the fundamental performances of the CSI 500. Josh also explained how China’s steady FX rate has made fixed-income products very popular among international investors. He predicts no further room for 10 years of Chinese governments bonds to drop in the short term in the next quarter.

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