Yahoo! Finance
China’s economy, labor market ‘the complete opposite’ of the U.S.: Economist
Yahoo Finance July 5, 2023
China’s economy continues to struggle in the wake of last year’s pandemic lockdowns. Steven Wieting, Citi Chief Investment Strategist and Chief Economist details how policy in China can help the country’s economy to rebound.
Video Transcript
DIANE KING HALL: We want to do a deeper dive into the impact of China. More disappointing news from the world’s second largest economy. China’s services purchasing Managers’ Index fell to 53.9 from 57.1 in May. While not a contraction, the weakest print since January.
China’s growth faltered in Q2, causing investors to pull back with the Hang Seng index down almost 6% in the last three months. We want to bring back in Steven Wieting, a City chief investment strategist and chief economist. Stephen, in your note you said you trimmed your allocation to Chinese equities in recognition of significant challenges. Can you explain that more?
STEVEN WIETING: Well, this has been a couple of moves. China’s economy from a long term perspective is an economy that’s likely to have a solid cyclical recovery. It has a lot of runway, has very high unemployment, headline inflation is zero, monetary and fiscal policy are easing. That’s just the complete opposite of where we are in the US right now.
All of the things that would get us concerned about the US that we’ve sort of run out of capacity to grow with tight labor markets, just the opposite in China. Unfortunately, after this reopening from COVID, their economy really stalled in the second quarter. There was a sharp reopening effect, you have low valuations, you have what should be low expectations.
But even with double digit retail sales growth, China’s economy is not matching the hopes that everyone had for it. And they do have some very significant overhang from a really terrible real estate depression much like ’08/’09 in the United States. And policy needs to take very definitive action, again, for China to reach its own growth targets. We think that action will come, but it’s a riskier backdrop. It’s very much more policy-dependent.
And China is not going to get help from the rest of the world from exports. Didn’t help them during the period when they were outperforming. But these internal reasons again, the lack of confidence in China right now is being felt very much in their asset prices and their valuations. Usually after these periods, returns are strong, but it can take some time and it can take some serious focus on action.
BRAD SMITH: Even with that lack of confidence, should there be an investor out there that is still trying to put some type of international or global positioning within their portfolio? What’s the smart play to then play the reopening in China right now?
STEVEN WIETING: Well, a couple of things. They have industry-leading technology in electric vehicles, in solar power, these things that are very emphasized as areas of development in China that are not, again, tied up in all of the geopolitics, again, of US-China. And again, you want to think about size. When you think about two decades of outperformance of US equities, 62% of global market cap trading at a vast valuation premium to the rest of the world, you put some money to work in a diversified portfolio.
Think about Brazil is another example. It’s one country that’s going to trade very, very differently from the United States, seven times earnings, 7% dividend yield, 9 and 1/2% real interest rate. That is very, very different from the US. So China and Brazil is examples or Japan. These are all places, regions that look very, very different. And they will perform better when US equities, when the large caps underperform.
So these are opportunities, fuel for economic recovery in the future in the next couple of years at much, much lower valuations. You have to scale it property. We have about 7% of portfolios in global portfolios, in China. And that includes for investors in that region of the world as well as US investors.
DIANE KING HALL: Steven, so as we know, the US and relationship with China is tenuous at best. What does that mean for the investor here? Do does the investor here, especially when you consider where growth is with China and it’s moving in fits and starts recently, does the investor here need to limit exposure, especially in a note that you shared with us that you called it your headline was China between disappointment and hope? I guess, what’s the hope?
STEVEN WIETING: Well, the hope is an economy with four times the population of the United States at a mid-level of income with a valuation about half the United States. And again, this can be a tricky issue. You can have constraints on the ability to invest directly in any of these economies.
But we are global investors, and we have clients all over the world, and we’re putting portfolios to get together that take offsetting risks in particular industries. Idiosyncratic risk, country risk has always been, again, the reason why global portfolios tend to have less severe declines during shocks. That’s not been a worry for the US in the last 20 years. That might not always be the case.
DIANE KING HALL: All right. We will have to leave it there. Thank you so much for joining us today, Steven Wieting, City chief investment strategist and chief economist. We appreciate you.