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Shanghai’s Pudong financial district. Structural reforms are key for China to maintain its rapid growth over the long term. Photo: EPA-EFE
Opinion
Sylvia Sheng
Sylvia Sheng

Chinese stocks buoyed by coronavirus containment, economic recovery and an improving outlook for reforms

  • In Europe and the US, fears of a resurgence in coronavirus cases have weighed heavily on market sentiment. In contrast, China’s better control of Covid-19 and broader economic recovery explain the resilience of Chinese equities

Developed-economy stocks lost more than 3 per cent in a choppy and tense October, their second fall in as many months. The drop was led mainly by European equities, which had their worst month since March, while stocks in the United States and Japan also suffered losses in October. China, however, marching to the beat of its own drum as usual, bucked the trend, with the CSI 300 Index gaining 2.4 per cent.

The resilience of Chinese equities can be partly explained by the China’s better control of Covid-19 outbreaks compared with other nations.
In Europe and the US, fears about the potential economic toll of surging coronavirus cases have weighed heavily on market sentiment. Countries across Europe are seeing sharp spikes in Covid-19 cases, with many now declaring more daily cases than in the first wave in spring.
The surges are stretching hospital capacity across parts of Europe and have resulted in tougher social distancing measures in many EU nations, including France and Germany.

Even though the disruption to industrial activity is likely to be more muted this time, as factories and companies will stay open, the European services sector is already feeling the pressure from the tightening of social distancing rules, as the slumping October purchasing managers’ index (PMI) for euro area services shows.

03:07

France aiming for ‘brutal brake on infections’ with its second national lockdown to fight Covid-19

France aiming for ‘brutal brake on infections’ with its second national lockdown to fight Covid-19
In the US, the coronavirus situation has also taken a turn for the worse, with daily confirmed cases continuing to set new single-day records in recent weeks.
In contrast, China seems to have Covid-19 under control, with daily domestic cases dropping back to single digits despite mini-outbreaks in Qingdao and Xinjiang. This has led to a broader economic recovery. Service sector output growth accelerated to 4.3 per cent year on year in the third quarter, from 1.9 per cent in the second quarter, and the October official service PMI climbed to 55.5, the highest level since June 2012.

China’s five-year plan: why markets must play a greater role

In addition, the fifth plenum of the 19th Communist Party congress signalled an emphasis on long-term catalysts for economic growth. The meeting’s communique pointed to the importance of the quality, rather than quantity, of growth, innovation and technology independence, and more structural reforms.

This will lead to greater spending on research and development in the medium term, promoting more productivity gains. The 14th five-year plan also underscored policymakers’ commitment to reform and raises the likelihood of faster reforms in the next five years.

Structural reforms are key for China to maintain its rapid growth over the long term, amid a number of challenges, both external and domestic. Rising geopolitical uncertainties mean the global trade environment is less favourable, while at home, an ageing population is weighing on growth momentum.

According to the UN Population Division, China’s working-age population (aged 15-64) is projected to decline by an average of 2.6 million a year over the next 10 years. Moreover, the economy is likely to see notable re-leveraging in 2020, as a result of weaker nominal GDP growth and government fiscal support this year. A highly leveraged economy may pose challenges to the pace of credit growth.

However, efficiency, and thus growth, could potentially be improved through structural reforms, especially in state-owned enterprises and in the financial and services sectors. This could lead to better resource allocation and productivity, boosting China’s long-term growth potential.

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Chinese SOEs appear inefficient by both domestic and international standards as their return on assets lags behind both their private-sector counterparts and SOEs in other emerging economies. Deregulating state-dominated service sectors, including financials, telecoms and health care, would help foster competition, while lowering barriers to entry would promote efficiency gains.

Global stock markets will continue to be buffeted as rising Covid-19 infections in Europe and the US cast doubt on their economic recoveries. However, Chinese equities are likely to remain resilient, supported by better virus containment measures in general, a solid economic recovery and an improving outlook for reforms.

Sylvia Sheng is a global multi-asset strategist at JP Morgan Asset Management

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