Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life.

For today’s Soundbites, we’re talking about China’s reopening and what it means for the global economy, with Arup Datta, head of the Global Quantitative Equity Team at Mackenzie Investments. We talked about the prognosis for Chinese investments, the resurgence in Chinese tourism, and the impact on the global economy. And we started by asking what kind of numbers he expects China to post this year.

Arup Datta (AD): There are various projections for China’s growth. The IMF has a 5% number, which I’m comfortable with for this year. Five percent is a step up from last year, where China grew only by 3%. Five to 6% is pretty healthy growth in my view. One needs to keep in mind that:

  • China is four times the U.S. in population;
  • the second largest economy in the world;
  • the world’s largest manufacturing economy and exporter of goods;
  • the middle class has become stronger in China; and
  • next to the U.S., China perhaps has the best variety of growth stocks throughout the world.

You know, many countries have growth in one particular area or another, for example, Taiwan in semiconductors. But China has growth stories everywhere. I mean, in terms of Covid vaccine, in terms of EV manufacturers. They have growth names scattered around all the sectors, which is not the case in most other countries.

The impact on global growth.

AD: China’s economy will definitely lead to global growth. You should think of China as running counter to the rest of the world. The rest of the world, especially led by the western world, has been dealing with inflation and, as a result, have been raising rates at a very, very hectic pace. China, is not trying to really raise interest rates, they’re trying to be more accommodative towards the market. So, they are countercyclical to the rest of the world tightening their economic growths. And therefore, they should definitely add to the global growth this year and next.

On China exports

AD: China’s strong anti-Covid policies was actually a boon for some of the emerging markets. China has 14% of overall global exports, even today. But given their strong anti-Covid lockdown policies, the numbers are a bit lower than what it could have been. And the beneficiaries of that were other Asian markets like Vietnam and India. Now with the reopening of the economy, China will regain some of the lost export growth, at the cost of these other markets. China’s exports to its trading partners will grow, and not be impeded as it was in the last couple of years, given their own internal policies.

Increased Asian tourism.

AD: Chinese, the world over, have been a big player of tourism. That came to a standstill. But Chinese tourism is about to restart. Tourism within China has already restarted; it’s almost back to pre-Covid levels. And now the rest of the world is trying to lower down the requirements for Chinese to travel. Chinese tourism will go back to pre-Covid levels externally very soon, which will be a huge impetus for global tourism.

The prognosis for Chinese equities.

AD: Anyway, you look at it, Chinese equity looks cheap. And usually that’s one of the metrics I look at if I want to invest for the long run. All the impetus is for China economic growth to really take off in the next couple of years. One hesitation in a longer-term, five to 10 years, would be how much would President Xi’s view on common prosperity come back into play. The Chinese government, in the last few years, has gone after some of the tech bellwethers like Alibaba, Tencent, etc. Right now, the regulation against those companies has definitely grown to a standstill. Now, has that focus changed for good? If so, that’ll be great for the equity markets. But if they emphasize that fully at the expense of everything else, that’s where the long-term view may not be as rosy.

And finally, what’s the bottom line for investors.

AD: People should have exposure to China. I believe, especially in Canada, people are under-invested in emerging markets and China. And maybe that was the right place to be in the last decade, where the North American market did very well. I would not bet on that going forward. China is a very cheap market, second largest economy in the world, huge consumer base, and running counter in terms of its economic policy compared to most of the world, which is worried about inflation and tightening. And I believe at least for the next couple of years the Chinese government will not get in the way of the equity markets. The catalyst is there for the equity market to do well.

Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Arup Datta of Mackenzie Investments.

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