Strong GDP data from China, but…

By Peter Lundgreen,

For some time now, investors have been noticing the advance in China’s economy, but even these expectations have been surpassed by reality.

China recently announced a GDP growth of 6.5 pct. in the fourth quarter 2020 compared to the same quarter the year before, and it reveals an impressive strength in the economy. The growth was higher than expected, and quite interestingly, the growth in the fourth quarter of 2020 was also higher than during the same period in 2019, with a GDP growth of 6.0 pct. This means that economic growth after the Covid-19 crisis in China is higher than it was before the pandemic.

The exports beat all expectations, which again contributed to the fact that the industrial production was the strongest force behind economic growth in the past quarter. There is also a public stimulus behind this progress, but this situation is now far from an exclusive Chinese phenomenon anymore. If one looks at the stimulus packages around the world, then the aid goes in all directions, and if one listens to politicians from near and far, then public spending just has to increase on all fronts.

So, where China was previously famous for creating high GDP growth via public investments, it is now a possibility that Western governments are overtaking China on this point. This is still an open question, but no matter what, the economic resilience of individual countries will be a hot topic on the other side of the Covid-19 crisis- also in this context, I expect investors to award plus points to China.

However, the very important happening takes place in March, when the new 5-year plan will be presented. My expectation remains that the 5-year plan will work with “the dual circulation policy”. On the one hand, the focus is on the external economy, especially exports, and the other half of the economy is the domestic part of the economy. I estimate that equity investors will be disappointed if no specific work is done to promote private consumption in the new 5-year plan, and it will remain incredibly exciting when the plan is presented in March.

Back in November, the healthy growth rates became apparent in China, so it is not surprising that the domestic Chinese A-share market has gone up with 10 pct. since then.  One might wonder why the stock market didn’t jump higher, but, as usual, China is not that straightforward.

Chinese stocks traded outside China (typically in Hong Kong and New York) have had a strong start this year. Hong Kong’s stock market has risen second most in the global race in January (Vietnam’s stock market is number one). As the Chinese stocks outside China have surged so much, one could be led to the idea that it is Western investors who are the big buyers. This is partly the case, as many Western investors also want to benefit from China’s robust economic growth. However, Chinese investors can also buy the Chinese stocks listed in Hong Kong, typically through investment funds, so both Western and Chinese investors are currently among the bulls in the Hong Kong market. One explanation for the appetite from domestic investors is simply that the Chinese renminbi has increased sharply during 2020, with the Hong Kong dollar instead following the US dollar.

It is a situation that has emerged because some of the currencies involved are not freely convertible. However, one should not underestimate the most important reason, namely that investors invest because they believe in further progress in the economy and in companies in China.

The optimism in the stock market will certainly last for a while, though it is particularly exciting whether domestic Chinese investors continue their acquisitions in the domestic market Chinese A-share market. In this connection, I keep an eye on whether the 3,600 mark will break in the leading Shanghai index, which I expect to happen.

To keep the bulls optimistic, the journey forward must find a healthy breeding ground, which is a stronger growth in private consumption in China. It is my primary scenario that this also materialises, however, here is the biggest “but”, or the risk of a disappointment if one wants. It is my assessment of the stock market that private consumption needs to accelerate to satisfy equity investors. Here, the new 5-year plan will, as mentioned, play a major role and requires a special focus on stimulating the households and private consumption in China, which I expect will be clarified in March.

Peter Lundgreen is the Founding CEO of Lundgreen’s Capital. He is a professional investment advisor with over 30 years of experience and a power entrepreneur in investment & finance. Peter is an international columnist and speaker on topics about the global financial markets.

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