Will Chinese Equities Roar in the Year of the Tiger?

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On February 1, China bids farewell to the Year of the Ox and rings in the Year of the Tiger. The ox symbolizes prosperity, diligence, and perseverance. In 2021, this symbol was apt, as Chinese economic policy shifted from “growth at all costs” to “common prosperity” and the country diligently persevered through many regulatory changes. Chinese equities were collateral damage in the process. As the Year of the Tiger rolls in, Chinese equities could remain volatile but purr stronger.

Slowdown in China

As the world’s second-largest economy, China has grown at an average rate of nearly 9 percent per year since the turn of the century, with the exception of 2020. It was one of the first major economies to exceed its pre-pandemic size. In the last year, China’s growth has started to show signs of slowing as it faces three major pressures: 1) muted consumer spending and supply disruptions as the country remains on a zero Covid-19 policy, 2) stifling regulations leading to weakening economic expectations, and 3) a structural slowdown in the property sector. Tighter monetary conditions from policymakers trying to rein in financial risks have also contributed to slowing growth.

Shifting Fiscal and Monetary Policy

As the economy slowed in the fourth quarter of last year, top officials and the People’s Bank of China emphasized the goal of economic stability in 2022. A shift in their stance became evident, from tightening to normalization and then toward the easing needed to meet a GDP growth target estimated at 5 percent for 2022. Fiscal stimulus is likely to be directed toward infrastructure spending and tax cuts. The People’s Bank of China will execute on its role by maintaining ample interbank liquidity and encouraging credit growth. While most global central banks are tightening monetary policy, the Chinese central bank is bucking the trend. The recent reduction in several benchmark interest rates is evidence of ongoing monetary easing.

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