While China weathered the Covid crisis better than anyone, the new year presents its own challenges: de-risking the financial system, supporting a domestic recovery, addressing a growing wealth gap, and fostering innovation. The way ahead will be more difficult, less predictable, and highly contingent on complex policy choices. The risk of a policy error is high.
Edmund Ng (CIO, Eastfort Asset Management), Louis-Vincent Gave (CEO, Gavekal Capital), and Sian Goh (Head of Research and Strategy, Dymon Asia Capital) joined us to unpack the key developments which could influence China and global markets in 2021.
Below you can read important highlights from our discussion. Here’s a preview:
1. Don’t underestimate the extent to which 1989 was a traumatic event for this generation of Chinese leaders (LG)
2. China has moved from a vicious cycle to a virtuous one, sucking in global capital (EN, LG & SG)
3. Beijing’s deleveraging campaign will lead to more defaults in 2021; risk of policy error is high (EN & SG)
4. The market cap of semiconductors now exceeds the market cap of energy sector; the market is telling us something (LG)
5. China’s one-child policy constrains military options against Taiwan (EN & LG)
6. Every Chinese company fears becoming the next Huawei (LG)
7. America will aim to restrict the flow of capital to China (LG)
8. China is putting trade treaties in place to subvert American action (SG)
9. EM risk parity is working well, but more dispersion is coming (SG)
10. The biggest risk to China comes from the environment (LG)
Let’s jump in.
1. Don’t underestimate the extent to which 1989 was a traumatic event for this generation of Chinese leaders
Background: What’s widely understood is that Tiananmen Square protests in 1989 were about demands for freedoms and democracy. But that’s not how Chinese leaders view it. They believe students were angry because inflation was running at 25 percent.
Why it matters: This historical experience drives policy settings. If you're a Marxist Chinese that lived through 1989, your belief is inflation equals social instability equals revolution. And that’s the worst thing that can happen because th