Chinese stock market outlook 2022: a recovery year?

It’s plunged by a third from its February peak and the Chinese market has some serious hurdles to overcome in 2022. Our overseas investing expert gives his verdict.

Rodney Hobson is an experienced financial writer and commentator who has held senior editorial positions on publications and websites in the UK and Asia, including Business News Editor on The Times and Editor of Shares magazine. He speaks at investment shows, including the London Investor Show, and on cruise ships. His investment books include Shares Made Simple, the best-selling beginner's guide to the stock market. He is qualified as a representative under the Financial Services Act.

Economic growth is still slowing, major companies have become overstretched, fellow Pacific nations are uniting in opposition, the blame for global warming has moved eastwards and Africa is proving to be a bottomless pit. Welcome to the real world, China.

It is just a few short years since growth in the world’s second-largest economy was running in double digits. As the Chinese economy matures, its leaders are finding, as those in other high-growth nations have done in the past, that this exciting pace is not sustainable. This and next year’s growth are likely to turn out at little more than 5%, still a commendable achievement but a warning that worse is to come despite China faring better than most nations during the epidemic.

Some clouds hang over the Chinese economy, mainly in the overheated property sector where hubris has prompted the construction of vanity projects. The odd mix of entrepreneurism and state control that has developed under the leadership of President Xi Jinping, has brought together two incompatible bedfellows and created a widening of social inequality that is pricing less wealthy citizens out of cities. The reputation of China as a place for foreigners to invest is at stake as President Xi attempts to square the circle.

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Major property company Evergrande (SEHK:6666), listed on the Hong Kong Stock Exchange, is overloaded with debt that would shame a capitalist outfit, owing $300 billion at one point. Hit badly by a downturn in the Chinese property market, it has failed to pay several bond payments on time in the past few months. A formal default was avoided by negotiating – or effectively imposing – a 30-day grace period during which it managed to scramble together the necessary cash for each repayment. However, inevitably matters reached a point where a $82.5.5 million bond payment to international investors remained unpaid even after the grace period.

The company has admitted that it may be unable to meet future payments on its $19 billion international bonds, even though it has sold off land at a 70% discount in a desperate attempt to raise money and has handed over unfinished properties to settle bills from suppliers. The shares have collapsed from HK$19 to less than HK$3 in just 10 months.

Construction has been halted on many of its 800 projects, throwing workers out of employment and leaving would-be housebuilders with lost deposits. China, with 1.4 million inhabitants and a growing and increasingly prosperous middle class, is big enough to absorb one major bankruptcy but other debt-laden property companies face similar difficulties. It is estimated that the Chinese property sector owes a total of $5 trillion.

Kaisa (SEHK:1638) failed to repay a $400 million debt due in early December, and is struggling to meet further payments on its $12 billion international bonds as its shares collapsed below HK1; Sunshine 100 defaulted on a $170 million bond around the same time.

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Chinese authorities have sent a working party into Evergrande to try to minimise the disaster and President Xi will be pulling the strings. Xi wants to move the Chinese economy away from speculative property deals and into productive sectors such as manufacturing, technology and infrastructure. Ironically, Evergrande has itself been diversifying into other sectors including banking, insurance, hospitals and even bottled water. Two years ago, it announced its ambition to become the largest electric-vehicle manufacturer in the world.

Letting Evergrande go to the wall is a high-risk game. Its travails have dragged down both the Shanghai and Hong Kong stock markets and foreign investors will not want to be squandering the funds they are entrusted with on further Far Eastern adventures. Similarly, smaller Chinese banks that have also helped to finance the property boom could be ruined by the knock-on effect of property failures.

In any case, the intended switch to manufacturing in the wider Chinese economy is not going smoothly. After a strong rebound from the first pandemic wave, manufacturing has been held back by a strategy of trying to achieve zero Covid cases that has involved occasional draconian shutdowns at little or no notice in various parts of the country.

Further disruption has been caused by power shortages, despite the breakneck pace of construction of coal-fired power stations, by rising commodity and energy prices, by computer chip shortages, by new environmental rules and by a shortfall in construction that can only be exacerbated by the travails of Evergrande and its peers. Yet Beijing has decided that this is the time to raise the amount of foreign currency reserves Chinese banks must hold, which puts a strain on the amount of money they can lend to keep the economy expanding. 

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Technology, where China looked to be making great leaps forward in 2020, has similarly been held back by new regulations from a government that is supposedly fostering the sector. New data protection laws and restrictions on screen time for young people may help the authorities to control the population, but does nothing to promote the industry at a time when Western powers are increasingly suspicious of Chinese intentions. Major player Tencent (SEHK:700) has been ordered to stop rolling out new apps unless they have been approved by the government.

New manufacturing orders have been weak since September and factory gate inflation is at its highest level for five years. The Chinese government has to juggle stimulating the economy before it comes nearer to stagnation and keeping inflation under control. This is a dilemma that Chinese governments have little experience dealing with.  

Nor are they particularly experienced at making friends overseas. The Winter Olympics in Beijing in February, far from turning into an international showcase as the 2008 Summer Olympics did, could push China towards isolation just when it needs greater trade connections. Competitors will turn up, but the diplomatic community is becoming decidedly frosty over human rights abuses.

Perhaps the Chinese authorities feel that its belt and road initiative to connect with countries across Asia and into Africa is more than adequate compensation. By 2027, China will have poured $1.3 trillion into the programme, and already it has reached the Atlantic Ocean in Equatorial Guinea, where it has a deep-water port.

As Western nations have found to their cost, China is discovering that the rulers of some of its African partners squander the investment and others find that they are unable to repay loans.

In the generally less favourable atmosphere surrounding Chinese investments, the MSCI Index is down by double digits since the start of the year and by over 33% since the February peak. There is likely to be further slippage as we enter the new year.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.