Most analysts expect the Year of the Ox to be a prosperous one for China. Social and economic affects of Covid-19 are fading, GDP growth is forecast to hit 8.0%, while the MSCI China Index is expected to show earnings growth in excess of 15%. However, much depends on external developments.
Most of us have put President Trump’s administration behind us and moved on. However, an executive order issued by Trump in November 2020 forbids US investments in Chinese companies believed by the White House to be controlled by the Chinese military. In response, the New York Stock Exchange (NYSE) said it would begin delisting China Mobile, China Telecom and China Unicom Hong Kong. After a bit of back and forth, the NYSE initiated the delisting process, with implications for index providers such as Standard & Poor’s, Dow Jones, MSCI and FTSE Russell. There is concern that other Chinese companies will be subjected to delisting. It remains to be seen whether President Biden will rescind or reinterpret this particular executive order. In our view, while President Biden is unlikely to publicly reverse course without some concessions from China, the NYSE could go back on its decision (with political reassurance from Janet Yellen and the US Treasury). While delisting is not a major issue in and of itself, the optics will have a very strong signaling effect on relations between the US and China.
A new direction at the WTO?
The appointment of Nigerian economist Ngozi Okonjo-Iweala to lead the World Trade Organization suggests that a stricter approach to China could be in the offing. The US and Europe clearly have China at the top of their trade dispute priorities. Trump played a heavy hand with China and seemed to come out on top in the end. Yet Chinese imports of US goods in 2020 only came to around 60% of the total negotiated under Phase One of the US-China trade deal. This will be unsatisfactory to the US, which already has billions of dollars’ worth of tariffs in place. China has thrived, with its trade balance expanding to a new high despite tariffs and Covid-19 restrictions. This will not be seen as fair to Western nations. Trade developments are a threat to China’s strong 2021 economic and earnings growth outlook. Messaging by the US and Europe on their priorities will come, and the US-China trade relationship may not shift all that meaningfully in the Year of the Ox.
China has used stringent public health measures to contain cases during outbreaks, helping bring down numbers. However, its slow adoption of Covid-19 vaccines, which are critical for long-term control, is an issue. Perhaps it is because behavioral engineering worked so well that the required urgency is lacking. Last year’s Lunar New Year on February 12 resulted in significant outbreaks of Covid-19; this year, while travel has been restricted, outbreak fears are still warranted. China’s GDP is forecast to grow 8% this year, the highest rate in a decade; however, failure to contain the virus would jeopardize these forecasts.
With China’s stock market outperforming the rest of the world and Chinese growth leading the global economic recovery, any disruption is worth keeping an eye on.