2021 is the year of the Ox and it is said that those born this year are generally reliable and trustworthy although they can expect to face obstacles early on. Following a year of extreme market volatility, markets may hope for the same.
China has been leading the post-Covid global economic recovery by example. Covid-19 has necessitated a multi-dimensional policy approach to improving healthcare outcomes and putting the real economy back to solid footing via targeted monetary and fiscal policy. Efforts to limit infection rates and stabilise the economy have been fruitful: the Chinese economy has already surpassed its pre-crisis GDP level. We expect a majority of developed and emerging markets to follow China’s footsteps and reach pre-crisis levels of economic activity during H2 2021.
The rising global tide of growth will likely further fuel the Chinese economy. However, once the tide pulls away, we should see the full effects of pre-existing trends that have accelerated thanks to Covid-19. In our view, two trends are likely to have the most impact on the Chinese economy and society in the long-term: deglobalisation and digitalisation.
Deglobalisation:
We see a fundamental shift in the world order with protracted deglobalisation and rise in geopolitical tensions. Covid-19 simply expedited the transition to this new world order.
Deglobalisation causes supply chains to shorten or diversify to countries where costs to trade are lower within countries that are geographically closer and politically more alike. Hence we may see global trade disintegrating into three blocks: Asian trade bloc centred on China; European trade bloc; American trade bloc centred on the US, Canada and Mexico.
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The formation of an Asian regional trading bloc, with China at its centre, has been in the making during the past decade, helped by spreading technological know-how and rising prosperity of the region’s middle class. In fact, intra-Asia trade increased from around 50% of total trade in 2000 to 60% in 2019. Covid-19 simply accelerated the transition to a trade environment where countries retreat to inside borders. Clear beneficiaries will be China’s tech industry and trade, North East Asia’s manufacturing sector and ASEAN low-cost producers. North Asian countries such as Korea, Vietnam, and Taiwan with close ties to the more resilient sectors of the Mainland Chinese economy will also benefit from this new trade bloc.
The diminishing influence of US and Europe in the Indo-Pacific region will benefit China geopolitically as well. As economic relations tighten in the region, formation of new geopolitical alliances may occur, exerting pressure on US’s allies such as Japan and Korea. This has the potential to fuel the US-China geopolitical, trade and technological conflict that the Biden administration inherited from the previous US administration. Nevertheless, compared to the previous US administration, we expect a less volatile, more cooperative and rules-based approach to relations between the two countries.
Digitalisation:
China’s mandate to focus on economic transformation from high growth to sustainable high-quality growth remains unchanged. Certain key economic goals for the economy, such as innovation, self-sufficiency in key technologies, promoting domestic circulation by boosting high-quality consumption growth will rely heavily on the pace of digitalisation.
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Consumers and businesses in China have accelerated their use of digital technologies because of Covid-19. Before Covid-19, China was already the leader of global e-commerce, making up 45% of world e-commerce transactions. Sectors that could benefit from a more permanent change in consumer behaviour due to the pandemic are likely to experience further growth. The pandemic has accelerated the adoption of digitalisation in sectors that require physical contact such as in healthcare, education, retail, and working practices. Furthermore, the Covid-19 pandemic highlights the investment opportunity in internet stocks from China and the rest of the developing world, which benefit from the virus environment and tend to have strong cash generation.
For investors considering investing in China, these long term themes of deglobalisation and digitalisation can expect to provide valuable opportunities for investment this Chinese New Year and beyond.
Lale Akoner is senior market strategist at BNY Mellon Investment Management
