Jean Boivin, Head of BlackRock Investment Institute together with Wei Li, Global Chief Investment Strategist, Ben Powell, Chief Investment Strategist for APAC and Yu Song, Chief China Economist 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.
China’s regulatory clampdown on industries such as tutoring and tech has unnerved global investors. We see little global spillover risk from China’s assertion of greater control over certain industries, even as it potentially leads to market volatility. We remain tactically neutral on China stocks and see further monetary and fiscal policy loosening as beneficial for cyclical assets in China.
Sources: BlackRock Investment Institute, with data from Markit Economics, July 2021. Notes: The yellow line represents the monthly Markit purchasing managers’ index (PMI) of developed markets, including Australia, Austria, Canada, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, Singapore, South Korea, Spain, Taiwan, the UK and U.S. The orange line shows the monthly Caixin China composite PMI.
We see last week’s developments in line with China’s long-term hawkish macro policy stance and regulatory clampdown as the country pursues quality growth. This process is not a straight line, and we see a dovish shift in the near term as economic growth has been losing momentum.
China’s economy returned to its pre-pandemic growth trend in late 2020, but has shown signs of slowing in recent months. China’s Caixin composite purchasing managers’ index (PMI) has dipped from a peak of 57.5 in late 2020 to near 50 in June – still in expansionary territory but below the level seen in developed markets. See the chart above.
Against this backdrop, Chinese authorities have started a dovish shift in near-term monetary and fiscal policy, and we expect them to moderate the pace of the regulatory tightening that has recently rattled markets.
The Politburo of the Chinese Communist Party, which is made up of the country’s most senior leaders, held a key policy meeting last week. It recognized downside risks on growth and the need to cushion these risks by pre-emptively easing its policy stance. We expect China’s broad-based, macro policy stance to loosen further during the rest of the year –including monetary, fiscal and some administrative aspects, and see cyclical assets potentially benefitting. Yet we expect a measured approach from policymakers. The Politburo’s meeting statement struck a slightly dovish tone on regulatory policy, and we see this as a reflection of the pragmatism of China’s leadership after recent regulatory moves led to market volatility.
This does not imply a fundamental shift in the regulatory policy stance, in our view. We believe the regulatory clampdown will likely go on for years, yet its intensity will fluctuate. China’s leadership sees regulatory tightening in sectors such as tutoring and technology as necessary to rein in the industries that have been rapidly growing and lightly regulated, which has led to concerns about control of data, inequality, and the rising costs of education, housing and healthcare, in our view.
Keeping tabs on Chinese policy priorities will be key. Our take: Chinese authorities will likely balance their regulatory agenda against a desire for economic stability, and the intensity of the regulatory crackdown may ease amid slower growth and market volatility. Yet Beijing’s targeted regulatory actions may still inadvertently trigger episodic market volatility, as witnessed in recent weeks. China’s policymakers are loosening policy for the near term, but we expect them to stick to a medium-term hawkish stance – key to Beijing’s effort to focus on the quality of growth. Uncertainties around Beijing’s hardened stance on selected sectors – not growth concerns – were the main reason for recent market anxiety, in our view. We expect the regulatory clampdown to continue, but its pace and intensity may moderate as policymakers weigh its impact on growth and markets.
The bottom line: We remain neutral on Chinese equities tactically, but are seeing opportunities emerge in sectors that benefit from monetary easing or are less prone to regulatory tightening. We stand by our strategic preference for Chinese assets. The case for Chinese government bonds in particular is undimmed, in our view, and remains a key strategic overweight in a low-yield world. We recognize implementation of our asset views will differ across investor types and geographies, depending on objectives, constraints and regulation.
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 29, 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, Bank of America Merrill Lynch Global High Yield Index, ICE U.S. Dollar Index (DXY), MSCI Emerging Markets Index, Refinitiv Datastream Italy 10-year benchmark government bond index, Refinitiv Datastream Germany 10-year benchmark government bond index, J.P. Morgan EMBI Index, Bank of America Merrill Lynch Global Broad Corporate Index, Refinitiv Datastream U.S. 10-year benchmark government bond index and spot gold.
The Fed as expected acknowledged further progress toward its goals but still sees some way to go before it can begin talking about a tapering of asset purchases. We see tapering unlikely to start before early next year given the Fed’s intention to provide ample notice. The U.S. Senate voted to advance a nearly $1 trillion infrastructure bill that delivers $550 billion in incremental new funding for public transit, roads and bridges, and other physical infrastructure.
August 2 – U.S., China, euro area, UK, Japan manufacturing PMI
August 4 – U.S., China, UK, Japan services PMI; euro area composite PMI
August 5 – Bank of England monetary policy decision
August 6 – U.S. nonfarm payrolls
U.S. nonfarm payrolls data will be in focus. Consensus forecast expected an increase of 900,000 jobs in July, according to Refinitiv, after posting the largest monthly gain in June on the back of a strong growth in services sector.
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