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20/07/2021
BlackRock Commentary: Our views on China's policy finetuning

Wei Li, Global Chief Investment Strategist and the BlackRock Investment Institute together with Ben Powell, Chief Investment Strategist for APAC, Yu Song, Chief China Economist and Vivek Paul, Senior Portfolio Strategist, all part of the BlackRock Investment Institute, share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.

We see China’s recent policy loosening as an important shift to a modestly more supportive stance for the near term, yet don’t expect the overall hawkish bias to change as it is crucial in China’s focus on quality growth in the medium term. This is supportive of our views on China: We are neutral on equities and overweight government bonds tactically, and positive on both on a strategic horizon.

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Forward looking estimates may not come to pass. Sources: BlackRock Investment Institute, International Monetary Foundation, Thomson Reuters, with data from Refinitiv, July 2021. Notes: The solid orange line shows the actual path of Chinese real gross domestic product (GDP) from 2019 onwards. The yellow dotted line shows the IMF’s projections outlined in its 2019 October World Economic Outlook – the last published estimate before the Covid shock hit. The data is rebased to 100 at the first quarter of 2019.

 

We debuted our standalone China asset views in our Midyear 2021 global outlook, as we believe it is time to treat it as an investment destination separate from emerging markets (EM) and developed markets (DM). China’s policymakers have held a hawkish stance since mid-2020; China’s economy returned to its pre-pandemic growth trend in late 2020, as shown in the chart. In recent months growth has shown signs of slowing, though last week’s data was largely positive, with better-than-expected June activity data and slower-than-expected second-quarter GDP growth. This may have given Beijing the incentive to frontload policy support in order to stave off a potentially more pronounced slowdown, especially as inflation pressures have eased, in our view. Earlier this month the People’s Bank of China cut the reserve requirement ratio for most banks, or the required amount of cash banks must hold as reserves. We see potential for more, broad-based loosening in the near term, including in fiscal and other policies. Yet we expect a measured approach from policymakers, and see their medium-term hawkish stance unchanged despite the near-term finetuning. A Chinese Communist Party’s politburo meeting later this month will be key to watch.

We see an overall hawkish policy stance as critical to China’s “quality revolution” – an effort to move away from an overriding effort on the quantity of growth toward a greater focus on the quality of growth. China aims to become a more productive economy with each unit of incremental GDP generating proportionately less pollution, inequality and financial risk (debt). This is key to our China asset views. We are tactically neutral on Chinese equities but strategically positive because we believe ongoing reforms in China could weigh on near-term growth but potentially improve its quality in the long run. We are overweight Chinese government bonds on both tactical and strategic basis as we believe China will continue to have relatively high nominal and real yields compared to global peers, thanks to its hawkish policy stance. The persistent inflows to China bond exchange-traded products (ETPs) have underlined the appeal. Year-to-date cumulative flows into global China bond ETPs stood at $14.1 billion as of July 12, vs. a record $16.2 billion in 2020, our data showed.

Monetary and fiscal policy tightening is just one aspect of China’s overall hawkish policy stance, with the other two being  measures to stabilize property price increases and an anti-monopoly clampdown. Property market policies will unlikely change much, in our view. The anti-monopoly campaign has become a significant market driver, causing China’s tech sector to shed as much as $1 trillion in market capitalization since February. As a result, market positioning has become much less crowded in this space and market pricing now looks to be somewhat reflecting the clampdown. We expect this campaign to continue, but see potential for reduced intensity as the government’s near-term focus shifts to encouraging growth. This renewed focus on growth may also continue to keep credit defaults contained, after the effort to restructure China’s credit markets to nurture more productive companies and a healthier economy has driven an increase in corporate debt defaults this year, in our view.

The bottom line: China’s policymakers may be loosening up policy for the near term, but we still expect them to uphold the hawkish stance over the medium term to advance its quality revolution. Strategically we see a need for dedicated exposures to China as one of the two poles of global. We recognize implementation of our asset views will differ across investor types and geographies, depending on objectives, constraints and regulation.

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Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream as of July 15, 2021. Notes: The two ends of the bars show the lowest and highest returns at any point this year to date, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are, in descending order: spot Brent crude, MSCI USA Index, MSCI Europe Index, MSCI Emerging Markets Index, ICE U.S. Dollar Index (DXY), Bank of America Merrill Lynch Global High Yield Index, J.P. Morgan EMBI Index, Refinitiv Datastream Italy 10-year benchmark government bond index, Bank of America Merrill Lynch Global Broad Corporate Index, Refinitiv Datastream U.S. 10-year benchmark government bond index, Refinitiv Datastream Germany 10-year benchmark government bond index and spot gold.


Market backdrop

U.S. consumer price index (CPI) gained 0.9% in June, the largest rise in 13 years, driven by the unusual supply and demand dynamics amid the powerful economic restart. We expect a higher inflation regime in the medium term – as a result of a more muted monetary policy response than in the past. In a noisy and unprecedented economic restart, volatility in data and market reaction is to some extent expected, in our view.  China’s GDP increased 7.9% year on year in the second quarter, slightly slower than expectations.

Week Ahead

  • July 22 – ECB policy meeting
  • July 23 – Flash purchasing managers’ index (PMI) for the U.S., euro area and UK

Investors will focus on the ECB’s first policy meeting after its strategic review was published. We expect an update of the central bank’s forward guidance on its monetary policy decisions to reflect its shift to a symmetric 2% inflation target, though we don’t expect updated growth or inflation forecast until September. Global PMI data will shed some light on the ongoing restart in activity as growth momentum shifts from the U.S. to Europe and Japan.


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This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of July 19th, 2021 and may change. The information and opinions are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain ’forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

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