Saturday, March 25

What awaits China in the year of the tiger? abrdn thinks

Chinese New Year, which falls on February 1 this year, will bring family gatherings with traditional food, fireworks, and time to reflect on the events of the past year and what awaits us in 2022, the year of the tiger.

Investors looking to diversify their global portfolios should consider China, as policymakers in this country are charting a different course than their Western counterparts. In the West, growth is likely to moderate but remain above trend due to stimulus policies and the introduction of vaccines. Due to high inflation, the US Federal Reserve is likely to raise interest rates and reduce its bulging balance sheet.

In contrast, the Chinese economy had already slowed down in the second half of last year, albeit with 8.1% growth for the entire year. The fiscal restriction, the modification of the regulations and the persistent effects of Covid-19 on consumption have contributed to this. China is now likely to adopt a more favorable policy.


The Chinese yuan, which will be wrapped in red envelopes as a traditional New Year’s gift, was one of the best-performing emerging market currencies last year, rising 2.7% against the US dollar and rising 8.1% against the trade-weighted China Foreign Exchange Exchange System (CFETS) basket. This strength might surprise analysts focused on China’s domestic weakness, but it is understandable in the context of macroeconomic and political divergences between China and the West.

The recovery of China’s industrial production on the supply side was faster and stronger than that of domestic consumer demand. While consumption in advanced economies recovered thanks to tax relief, bottlenecks in the supply chain held back production. This helped boost China’s exports, boosting its current account surplus and supporting the yuan.

As Western central banks flooded their financial systems with liquidity, the People’s Bank of China (PBoC) tightened interbank liquidity at the first signs of economic recovery in the second quarter of 2020. This helped keep the repo rate at China’s seven-day rate at 2.1%, a historically low figure, but well above zero or negative rates in the developed world.

Throughout 2022, we expect the macro and political divergence between China and the West to reverse, with the PBoC pursuing a looser monetary policy while the Fed enters a tightening cycle. The reduction in China’s reserve requirement ratio (RRR) and lending prime rate last year was the start of its easing path.

This reversal should be gradual and the yuan is likely to remain strong for now, but the best time to bet on the Chinese currency appreciating against the US dollar is probably over.

Fixed rent

The year of the ox (2021) was a challenge for the offshore bond market with supply deleveraging in the real estate sector.

Credit spreads on the JACI China index reached 400 basis points at the end of last year due to its heavy exposure to bonds issued by developers. This is the widest level since the 2011 euro crisis, surpassing the spreads reached during the renminbi (RMB) devaluation fears in 2015 and the impact of Covid-19 in 2020. Even excluding Evergrande, the default rate in the Chinese real estate market for high yield bonds soared to 11%.

Despite uncertainties over a heated real estate sector, policymakers moved to ease credit conditions for homebuyers and developers in the fourth quarter of 2021. As such, we anticipate more policy support this year to help stabilize the real estate market.

Credit spreads have priced in the probability of an adverse event, but we do not believe this will remain the norm in the long term, as we view the offshore credit market as offering a tactical investment opportunity. It will be essential to get it right both in the selection of credit and at the right time to invest.

Meanwhile, China’s local government bond (CGB) rate market was one of the best performers in 2021 (+5.6% vs. -6.6% for the Bloomberg Global Aggregate Treasury Index before currency effect ). Slower growth, RRR cuts and inclusion in the global bond index all contributed to this. Very low consumer prices, in contrast to red-hot inflation in the West, made China’s A+-rated CGB market, with positive real returns, a rarity.

In the case of the CGB in 2022, investors should view the market positively while growth is weak and policy support has yet to kick in. Once the recovery in growth has started and the PBoC begins to withdraw support, investors should consider duration risk and move towards the shorter end of the yield curve. Ten-year CGB yields of 2.86% are still low relative to history, after all.


There were no fireworks in Chinese equities last year, despite double-digit earnings growth, because the market and valuations tend to be driven by the credit cycle. The credit momentum of the Bloomberg 12-month index quickly went from extremely positive to extremely negative in 2021.

Unexpected changes in China’s regulatory policy complicated the picture. The clampdown in the internet and education sectors had a big impact on foreign equities, but domestic equities remained with their exposure to policy ‘winners’ such as green tech, semiconductors and electric vehicle supply chain. The HSCEI Offshore Equity Index was down -22% in 2021, while the MSCI China A Onshore Index finished flat.

Investors should note that policymakers initiated these regulatory reforms to foster long-term quality growth.

The year ahead

Red New Year’s lanterns are hung to attract energy, prosperity, and good luck, and the year ahead looks auspicious. We expect the authorities to refocus on short-term growth targets and anticipate measures to stabilize growth, such as increased infrastructure spending, investment in the manufacturing sector, a tax cut and stimulus to boost consumer spending . This should coincide with a turn in the credit cycle.

We view the outlook for Chinese A-shares this year as positive, supported by still-positive earnings growth and a re-rating of valuations. We favor a balanced exposure between new economy stocks with a strong growth outlook and old economy stocks with a valuation cushion.

Our stance on Chinese H shares is more nuanced. Even though earnings growth has slowed and investor positioning is already priced into foreign equities, we will wait for catalysts from regulators, or upward earnings revisions, before re-entering. in the market.

In Chinese tradition, tigers are adventurous and brave, qualities that investors can admire. Differences in economic and political outlook increase the importance of Chinese assets as a source of uncorrelated returns in global portfolios. Somewhat adventurous and brave diversification could play a key role for global investors in the year of the tiger.