In this article:
  • Optimism is on the rise as China leads global recovery  
  • Funding costs and default rates are set to increase 
  • Nation faces highest inflation pressure among regions  

Chinese executives enter 2021, the year of the Ox on China’s lunar calendar, increasingly bullish about the economic outlook, including plans to boost capital expenditure and hire more workers, according to Fidelity International’s analyst survey.

More than half of our China analysts report management teams are more confident about the year ahead, with only 4 per cent noting confidence was lower. On a monthly basis, management optimism has further risen in January from December, bucking a global moderation of sentiment as Covid-19 variants emerge in many countries. 

A “first in, first out” recovery from the Covid crisis is gathering steam in China, where spread of the coronavirus remains largely under control and exporters take advantage of supply-side disruptions in Western countries. Underpinning management optimism is China’s double-digit export jump in the fourth quarter, as well as a 2.3 per cent GDP gain for 2020 - the only positive reading among major economies.

“China is evolving into a more competitive structure and demand has been coming back,” said Jenny Lee, Hong Kong-based Head of Research Services at Fidelity International.

While global firms appear to be in an initial phase of recovery, our analysts in China report their companies are further advanced in the economic cycle - 36 per cent say their sectors are in the mid-stage of expansion, compared to a global average of 24 per cent. And only 18 per cent of China analysts report their sectors in an initial recovery, significantly below a 34 per cent global mean.

Meanwhile, China analysts are more optimistic about job growth over the next 12 months than those in any other regions. Our analysts expect workforces to grow by 6 per cent on average this year at Chinese companies, compared with an average of 2 per cent globally and contractions in Europe and Japan.

China’s unemployment rate has moderated to 5.2 per cent in December, the same as at the end of 2019, after spiking to 6.2 per cent in February, when the initial rapid spread of the coronavirus forced strict, widespread lockdowns. 

Hopes for an easing of the trade war with the US under new President Joe Biden may be boosting optimism, too.

Despite the general optimism, China faces a unique challenge in the year ahead: it’s the only region where analysts expect a rise in funding costs. It’s also the only region where default rates will rise over the next 12 months according to our analysts.

As the recovery deepens, the normalization of monetary policy, or at least the expectation of it, will loom large on the horizon. While most central banks are still making “whatever it takes” promises, the People’s Bank of China has been sending mixed signals to the market, draining liquidity at times..

“Funding costs were especially low in 2020 as local government financing vehicles needed to support the economic recovery”, an analyst covering industrials writes, “I expect funding costs to return to normal by early 2021 and could possibly increase further if policy tightening occurs.”

A spate of defaults by Chinese state-owned enterprises spooked fixed-income investors last year, leading to greater scrutiny and spread differentiation. The trend is likely to continue in 2021, as the authorities seek to reduce moral hazards arising from implicit government support for bonds sold by state-owned enterprises.

Tough measures against property speculation, including curbs on bank lending to developers and homebuyers, are adding to an increase in funding costs.

China faces the biggest threat of cost hikes among regions, with 61 per cent of analysts forecasting higher inflation pressure over the next 12 months, compared to a global average of 51 per cent. All eyes are on the Chinese central bank’s next moves, which may offer a key leading indicator on global tightening to come. Chances are the leader of recovery will become the first country to tighten. 

Yi Hu

Yi Hu

Investment Writer