Investment Strategies
Beijing's Easing Of Covid Controls Points To Brighter Market, Business Outlook

As China moves to liberalise its strict "zero-Covid" policy, the author of these comments argues that a "new cycle" has started in terms of valuations, structural changes and the overall global economy.
As reported earlier this week, China is loosening its zero-Covid regime in a bid to remove shackles from its economy. The controls had sparked widespread protests – challenging the very legitimacy of the Beijing regime only a few weeks after President Xi was re-installed as leader of the Communist Party-run nation.
The changes will allow infected people with mild or no symptoms to quarantine at home; there will no longer be tests for people travelling within the country.
Dato' Seri Cheah Cheng Hye, co-chairman and co-chief investment officer at Value Partners Group, has the following commentary. We are grateful to Value Partners for being able to re-issue these comments. The usual editorial disclaimers apply. Email tom.burroughes@wealthbriefing.com
In recent weeks, we have seen one positive surprise after another from Beijing. It has been faster than expected regarding easing Covid restrictions. In addition, a rescue package for the property market and a positive move in the right direction in terms of the relationship between China and the United States.
In fact, I believe that China has started a new cycle of growth
and recovery. At the party congress last month, it was confirmed
that economic growth is now China's number one priority. You can
see that economic growth is the main solution for many of the
challenges faced by China.
We saw panic buying from late October, and many Chinese stocks
went up by 20 per cent or more in just the last few weeks. My
analysis is that there is now a potential for the Chinese stock
market to increase by another 20 per cent to 40 per cent in this
new cycle but, having said that, of course I must
caution that market behaviour is such that it almost never goes
up or down with a straight line. So, there may still be some
turbulence ahead. But in general, the direction is looking very
positive indeed.
Let's review the key factors, according to the textbook, why
markets go up and down and add in a new factor as well. The key
factors that determine market direction traditionally
have been the direction of the economy, meaning whether
corporate earnings and dividends go up and down, the direction of
interest rates which determine the price of money, the direction,
very importantly, of investment sentiment.
A new factor, of course, will be geopolitics, which in the past
wasn't such a big thing, but now can have a direct and immediate
impact on market direction. For China, all the above factors have
been moving in the right direction at last. In fact, between
March 2020 and 2021, all those factors moved in a negative
direction for China. We are now seeing a turnaround. This is
major and, for the coming year, China is the one economy
showing solid growth.
Most forecasts for Chinese growth in 2023, including that from
the IMF, is for growth of between 4.5 per cent to 5.1 per cent.
In comparison, much of the developed world has entered a slowdown
and potential recession.
But China is coming into a new cycle. China can turn around
partly because inflationary pressures are low in China, so there
is room for stimulus, even some room perhaps for moderate easing
of interest rates. And the new property rescue package announced
by the Chinese government assures a soft landing for the troubled
property sector.
Geopolitical tensions have been reduced by the recent meeting
between President Biden and President Xi. In Bali, the United
States told the media that it is not seeking a confrontation with
China. And despite all that, Chinese stocks, despite the recent
rally, remain at rock bottom valuations that we last saw during
the Global Financial Crisis of 2008. So, you can see why people
like me, who have been following China since the
1980s, are pretty optimistic.
Now I think it is also important to put China in the global
context [to understand] how it looks for the global investor. The
world that my generation of investors knows has changed a lot
because we're used to a world where the US-dominated and provided
an umbrella for a sense of security and safety. We investors only
needed to focus on investing in business and commerce. And we
could let political leaders and military generals take care of
the geopolitics, but that's not true any more.
Global order has broken down; we have been swept by social
unrest, financialisation, inflation, war, etc. Even climate
change. We're seeing the weaponisation of trade, money, food
supplies, and even human talent. So I think the prevailing
investment approach of the last, maybe 25 years, with Fear Of
Missing Out, doesn't really work anymore.
The FOMO approach almost guarantees that investors will be
“whipsawed,” because markets have become so volatile and so
unpredictable, and the central bank “put” – meaning the
expectation of central banks coming to the rescue of markets at
each and every crisis. Frankly, central banks have run out
of room to implement such rescue packages, with the exception of
a few countries such as China. We have enjoyed too long a period
of easy money, almost free money, negative interest rates. The
amount of money printed since 1996 has increased several times
the size of the real economy. There's very little room there, and
it has become a very fragile situation of over-financialization
and rising inflation.
How do you survive the challenging environment for global
investors? I will argue that you survive by identifying
long-term durable themes for investing; themes that allow you to
ride out the roller-coaster swings to the market, where almost
every prediction can be proven right or wrong. What you want is a
solid, durable investment theme that allows you to hold on to the
conviction and eventually allows you to preserve your wealth and
pass it from one generation to another. I believe it's up to each
investor to figure out what their preferred long-term theme is.
But the key is that you must be in a situation where you can
avoid the risks of buying high and selling low.
For me, examples of long-term themes will include energy assets,
food assets, and key commodities, including copper and lithium,
defence stocks because the world is getting increasingly
uncertain. And one of my favourite themes is Chinese stocks and
bonds. China has simply become too big to ignore, and the key to
sustainable investing, in my view, is to find a sustainable
society that can withstand this era of huge
social, global, monetary and financial disorder
throughout our planet.
In China, there is a foundation of sustainability and a large and
growing middle class. China’s middle class today of 400 million
people is larger than the population of the US, and it is growing
very fast. Chinese middle-class people are likely to number 800
million or so by the end of the decade. This is a very solid
foundation of an inclusive society that people buy into. And that
allows the country to provide its own huge domestic market for
innovation, manufacturing, and distribution. It is a
self-contained continental economy that I think provides a high
chance of sustainability which I believe is key to wealth
preservation.
There are very significant changes going on in China in terms of
how people save and invest their savings, and this is really the
world's largest pool of savings. The 25-year addiction of the
Chinese public to buying property is beginning to fade away. This
is something that's happened only since Covid started so
many people don't realise this, but Chinese household wealth used
to be more than 50 per cent represented by just one asset class.
Real estate today is more like 37 per cent.
Meanwhile, the percentage of household assets allocated to
capital market products, to professionally managed funds has
risen to 13 per cent from just above zero a generation ago.
Chinese people have discovered the value of investing in the
capital market. And this is something that the Chinese government
is nurturing, this relocation of savings and wealth because the
property market is over-invested, and it was actually a bubble,
and it was no longer very productive. Eighty per cent of
Chinese households in the cities already own one or more
properties. So, China wants to redirect savings to productive
investments, especially innovation, green energy, and
manufacturing. And it is happening.
Why we are excited, of course, is that it means there is a lot of
new money waiting to enter the stock market and support share
prices and valuations, all from the Chinese mainland. At the same
time, there's a supply of new ideas and new initiatives.
A lot of Chinese companies are choosing to IPO in Shanghai,
Shenzhen, and Beijing – the mainland domestic markets. This
assures a lot of new opportunities for the public to enjoy
investing their savings, again moving away from the property
market. So, overall, we are quite confident to say that a new
economic cycle has started in terms of structural changes,
valuations, sentiment, and the overall global economy. I think
China is entering a new era. It is the turn of Chinese stocks to
shine.
About the author
Dato’ Seri Cheah has been in charge of Value Partners since he co-founded the firm in February 1993 with his partner, V-Nee Yeh. Throughout the 1990s, he held the position of chief investment officer and MD of Value Partners, responsible for managing both the firm’s funds and business operation. He led Value Partners to a listing on the Main Board of the Hong Kong Stock Exchange in 2007.