China 2022: Competing Weather Patterns

"An easing of monetary, fiscal and regulatory policies in 2022 should result in stronger economic performance and improved sentiment among Chinese investors, who drive their domestic exchanges."

-Andy Rothman, Investment Strategist

China’s 2022 investment environment will be defined by two competing weather patterns. The first is a clear easing cycle that is already developing in Beijing, which should result in stronger economic performance and improved sentiment among Chinese investors, who drive their domestic exchanges. The second weather system is an Arctic air mass which is rising from Washington, as the Biden administration appears intent on containing China with cold-war rhetoric and sanctions. Because China’s economy is driven primarily by domestic demand, that cold front is unlikely to disrupt the easing of monetary, fiscal and regulatory policies, but it will further depress American investor sentiment towards China, leading some in the U.S. to focus more on the A-share market.

Chinese policymakers signal macro easing

Through words and actions, China’s leaders have in recent weeks signaled a change of direction for the government’s economic policy, towards one more supportive of growth, in contrast to 2021’s focus on de-risking and tighter regulation. This will be a modest, gradual stimulus, but it should be big enough to reverse the macro slowdown that resulted from last year’s overly tight policies.

The rhetorical signals have been clear. The official readout from an early December meeting of the Politburo, comprised of the 25 most senior members of the Communist Party, did not mention regulation, anti-trust or “disorderly expansion of capital”—topics that were all discussed a year ago. Instead, the Politburo meeting summary focused on supporting growth.

That was followed by the annual meeting of senior economic officials, who called for making China’s economic pie larger, as part of promoting “common prosperity.” While the 2020 Central Economic Work Committee meeting touted policies to reduce risks and enhance regulatory oversight, last month’s meeting cited “economic development as the central task.” The language and tone of the Work Committee’s report suggests that while last year’s regulatory changes will continue to be implemented, there will not be a new regulatory crackdown in 2022, and the regulatory environment should be more predictable.