Kevin Frayer
China’s economy faces growing uncertainty as the government attempts to curb surging COVID-19 cases. Greg Bonnell speaks with Alfred Li, Co-Lead for International Equity at TD Asset Management, about the broader implications for markets.
Transcript
Greg Bonnell: Investors are keeping a careful eye on surging COVID cases and growing frustration with lockdowns in China. And of course, this all has big implications for the global economy. For more on this, we’re joined now by Alfred Li, co-lead for International Equity at TD Asset Management. Alfred, great to have you on the program. You’re here in North America. You’re usually based in Hong Kong, so it’s such a pleasure to have you in studio.
Alfred Li: A pleasure to be here.
Greg Bonnell: So let’s talk about some of the headlines that the investors have been digesting over the weekend. We’ve got some unease in the markets. There’s frustration in parts of China because of the lockdowns. How do we view all this from an investing perspective?
Alfred Li: I think this actually indicates a beginning of an improvement situation — of improving our situation. Obviously, after the 20th CCP national Congress, 20 guidelines were issued essentially calling for loosening, gradually loosening of the zero-COVID policy. But certainly, this is a trial approach. China is taking small baby steps in order to make sure that things are progressing without causing additional risk to the population. Obviously, these have made people become more optimistic over a more visible, sensible open up. But with the 2-step forward and one step back, once this situation has not progressed as they hoped for potentially some frustration has emerged.
But I think if we look at the positive aspect, this time around the number of cases that are achieved, or reached during the day has already existed at a level that arrived in the last episode in Shanghai last April. But we have much higher percentage of new cases that have no symptom. And we have only five death cases compared to north of 500 last time around. So that means either herd immunity has somehow established in the community over the past two years of pandemic, or lockdown. Or, the Chinese vaccines have better efficacy than people suspected. So I think we are on the right track, but some things are in the process.
Greg Bonnell: OK, so interesting things. As all of this unfolds in real time, what should we be thinking in terms of the implications for the Chinese economy? If you’re going to see — because there has been concern about the surge in cases. You say there’s reason for some optimism out there, but what does it actually mean for the growth of what they’re trying to achieve there?
Alfred Li: I think, obviously, the domestic consumption recovery is going to take time, given that it’s very certain that the Chinese government will adopt a very gradual approach, given that over the past two years, or almost three years there have been only some 5,000 cases. And this track record is what the Chinese authority is meant to keep.
So at the tail end of this disaster, they want to make sure that the whole economy, the whole population, get out of it smoothly. So we are expecting about a 4% or 5% growth in consumption, in 2023, in the early part of ’23. This is a gradual, or slight improvement from this year’s level.
At the same time, what’s going to support the economy to continue to expand is continue to be — going to be traditional infrastructure asset formation. And also, new infrastructure investment, which is expected to grow at 6% to 8% level. The real estate sector, now we can safely expect that to achieve the soft landing, given the PBOC and the Ministry of Finance has jointly issued policies urging both the policy banks and the commercial banks to provide direct financing to projects that are yet to be completed so that the developers in trouble, their underlying assets are not going to have to further deteriorate and spill over to the broader economy. At the same time, the credits and the financial supports are being provided to the remaining players in the industry so that they can remain functional, as they should, given their relatively disciplined balance sheet and their capability to continue to operate.
And on the export side, certainly we can expect some headwind, given the expected deterioration in global economy as the market for Chinese exports. Overall, we are expecting a mild improvement from the current year’s number, or level, for the Chinese economy, or GDP growth to achieve about 4% or 5% per annum growth in real term.
Greg Bonnell: So some possible catalysts there for the economy into next year, but perhaps some challenges as well when you talk about the global economy. What about the APEC summit recently? The Asia-Pacific Economic Cooperation summit. What did we glean from that?
Alfred Li: Yeah, that’s a series of diplomatic activities that Xi Jinping has done over a very concentrated 20 days. So the G20 is immediately followed by the APEC meeting. Over the course, Xi Jinping met a group of World leaders from the developed world and also from the developing countries across different regions. If we put these meetings in about, I think, four or five groups, firstly, I think the most noticeable is Xi Jinping’s meeting with Joe Biden. I think this is sending a positive signal to the world market, given that the two leaders mutually agreed that they should continue to curb competition conflict and to focus on the area that the two countries can work together. While at the same time acknowledging, especially from the US side, that China is a competition that they’re going to compete against going forward.
With the European leaders, Xi Jinping had a constructive discussion with the German councilor, with the French Prime Minister, with the leaders from the Netherlands, from Italy. With these four leaders, essentially the message coming out of the meeting indicating that China’s stance is essentially to urge, or to ask the countries to stay independent in terms of making policy decisions and making decisions based on their best benefit from their economy perspective.
With a group of leaders, or the developed countries in the Asia-Pac region, namely Japan, South Korea, Australia, and New Zealand, the message from there, and the both sides bilaterally agreed on mainly not to let geopolitical tension to interfere with the bilateral economic collaborations and the international treaties between China and those countries.
So these maintaining — containing conflict and developing economy collaboration and promote international treaties are the main theme with this group of countries.
The fourth group is the developing countries we see in the Asia-Pacific region, or especially Southeast Asian countries. Those are more close allies with China. They are mostly on the bridge and road initiative. There are more broad based collaboration between China and those countries in terms of both continuous build out of transportation networks, ranging from railroads to sea routes. And also, Direct Investments from China into those countries across different industries. And also, the rapidly expanding global trade, or international trades, between these countries. Collectively, RCEP or ASEAN countries accounts for China’s number one trading partner around the globe. So this group with a huge population and the rapid growth, economic growth, but from a relatively low base obviously, is what China is trying to cultivate going forward as both a main source of economic growth and international collaboration.
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