China: History doesn’t repeat itself but it often rhymes

March 10, 2022

The Chinese economy has undergone major changes over the past year, aimed at stabilizing the long-term sustainability of its economy. We discussed many of these changes in our commentary, Navigating through current China uncertainties (and opportunities). Looking ahead, we will continue to carefully analyze the movement of Beijing’s policies, which provide key insights into the economy and financial markets this year.

Based on our analysis and interactions with companies, we anticipate a better second half of the year, and history has shown us similar behavior.

Regarding the property sector, in the first two months of 2022, sales in the top 30 cities declined 29% year-over-year (YoY), making it the second worst year since the start of the decade. Sales for 200 developers in lower tier cities dropped 43% YoY.[1] Falling property prices are often an indicator of a drop in land values, which directly affects local governments, as it is an important source of revenue. 

If we recall the last property down cycles in 2011-12 and 2014-15, they lasted around 9 months. As the current down cycle started in September-October, best case scenario would be improvements starting in the second half of 2022. During the first half, most indicators will continue to look very bad, and developers may face problems.

What can the government do then to improve sentiment?

Real estate and credit growth have always been key metrics for GDP expansion in China. Further, previous down cycles could guide government action. For example, the government could turn to a more easing mode, similar to actions taken in 2012 and 2015. As a result, we could see growth of new housing starts to bottom. That said, we don’t expect a massive easing in the property market, unless situation spreads very widely.

In the second half of 2012, Chinese policy makers released a set of stimulus measures. While each of these measures differ, it is similar to what’s been happening in 2022. In 2012 policy makers were reluctant to loosen measures and reiterated the idle land policy: a 20% penalty if idled for one year and forfeiture if idled for two years. The policy makers wanted to test the market and see results with gradual easing.

In March of 2015, minimum down payment was reduced to from 60% to 40% for second time home buyers who have still not paid the first mortgage. For first time buyers the down payment was reduced from 30% to 20%. State Council meeting was held on Dec 14th and analyzed the urban planning for 2016. Key focus was to reduce real estate inventory deepening urbanization.

 In 2022, we think policy makers have the tools to do similar easing, although, considering last year’s common prosperity, the willingness to do so is likely a little more difficult.

Many cities are easing mortgage lending (e.g., Guangzhou), lowering down payment rates (e.g., Heze, a third-tier city in Shandong province), or relaxing home purchase restrictions (e.g., Zhengzhou). China will also make it easier for state-owned enterprises (SoE) to buy distressed assets for private peers in order to avoid a credit crunch in the sector. For example, SoEs acquiring distressed assets will not be majorly subject to the three red lines policies. Likewise, some developers are being allowed to issue bonds in onshore markets.

The last Politburo meeting in December had a clear message: policy makers would shift from regulatory tightening to supporting growth. We believe China will defend around 5.5% growth (announced last week in NPC meeting) and considering mounting growth pressures, the current property tightening mode should shift to a gradual easing, similar to 2012 and 2015. Top leaders have declared their intention to double the Chinese economy from 2020 to 2035, which implies a minimum 4.7% CAGR growth.

The main pillar of this relaxation cycle was understanding the change of policy makers from December 2020 (regulatory tightening) to 2021 (stability). What policy makers state at the beginning of the year is the most important message for understanding further actions. The latter meant that most probably regulation in many sectors has peaked. Chinese policy makers are extremely careful in making the best they can in order to fulfil their guidelines.

Together with property initial reactions, credit impulse is has also seemed bottoming up.  In January, credit figures came in better than expected. Total Social Financing was RMB 6.2 trillion (consensus 5.4 trillion) and credit growth expanded from 10.3% YoY) to 10.5% YoY.[2] This is part of the initiation of a more deep easing cycle.

Is it time to leverage the economy again?

It could be, if you consider the messages out of the yearly Politburo meetings. In 2019 it was all about deleveraging. Why? Because GDP growth was not an issue. In 2022, stability is the main concern, which implies that GDP growth is a target. Government bond issuance and short term corporate lending have picked up substantially (especially the latter) in January. 

In addition, on January 20th, China lowered its benchmark loan rate, or Loan Prime Rate (LPR), from 3.8% to 3.7%. Meanwhile, the 5-year LPR was also lowered by 5bps to 4.6% in December (a small move but this rate is linked to the property sector). On Monday of the same week the one year Medium Lending Facility (MLF) rate was lowered 10 bps. Again, not a relevant move but the importance was the signal considering it was the first move since April 2020. The MLF cutting cycle is also the 5th decrease since the global financing crisis. China will also enter in a divergence driven by its easing and the tightening on the FED. The latter could make some pressure over the Yuan over time which can eventually anticipate some further easing measures.

Another factor that can boost China’s economy this year is Infrastructure investment, which could accelerate in 2022, considering fiscal policy has ample room to turn from contraction to expansion. Fiscal deficit was solely 4.5% of GDP (vs 6.5% expected at the beginning of the year) rolling over more than 3 trillion for 2022 spending, although policymakers should lose the controls on local government debt.

Regarding consumption, the disposable income from Chinese families has been affected by current economy slowdown, however the greatest negative impact from consumption is Zero Covid policy. As long as this measure doesn’t change it will be very difficult for consumption metrics to improve. History has shown us that consumption growth has been quite stable in the past, with low volatility. This implies that any change in Zero Covid, can bump consumption in a great extent. Most likely it will be gradually changed to more targeted measures (not locking down entire cities), nevertheless we don’t expect the complete elimination of the policy until at least the National Congress of the Chinese Communist Party this fall.

China’s top scientist Zeng Guang recently declared that China and Covid could coexist.[3] This is an important signal for an eventual turning point of Beijing to open the door to more discussions in following periods.

Despite the sluggish current economy we are overweight in China our emerging markets (EM) Small Cap Portfolio. Our approach is to invest in companies/sectors that are subject to less regulation and more likely to benefit from the new trends that we see emerging in the future.

Zhou Hei Ya (1458 HK)

We have recently initiated a position in Zhou Hei Ya (ZHY) in our Global Alpha Emerging Markets Small Cap Strategy. Our global and international small cap strategy do not invest in this country. ZHY is a leading braised food company in China and their main products include packaged duck products, such as duck necks and wings.

The brand is originally from Wuhan and is particularly strong among many cities in the country. ZHY is the first company in China to introduce MAP, which makes it possible to store braised food for up to seven days in a chilled environment. In the past, braised food products had to be unpackaged and consumed within the same day, hence it could only serve dining demand. MAP technology makes it much easier for people to consume braised foods on a variety of occasions.

China’s casual braised food industry reached a market size of RMB 109 billion in retail sales as of 2020, growing at a 16% CAGR over 2015-20. According to Frost & Sullivan they should continue increasing at similar pace, reaching RMB 205 billion in 2025. The main reasons for this increase are: increasing repurchases, a recovery in traffic post Covid-19, growing all-day snacking demand, and a convergence of consumer behavior in low-tier cities vs. top-tier cities.

ZHY has a highly standardized and scalable operating model. In 2019 it installed a franchisee model that will very likely speed up growth. ZHY has superior store unit economics (self-operating and franchisee stores take two to three months to breakeven), distinctive brand positioning, high stickiness, and are popular among the younger population It has been severely affected by Covid, but store openings are intact. We see strong potential for store expansions throughout China, fostering earnings and margins growth. Post Covid-19, we believe consumers will prefer more quality, healthier products. ZHY’s packaged products are perceived as safe and cleaner products vs. unpackaged ones. In summary, after a very tough 2021 and a difficult first half of 2022, we are starting to see some light at the end of the tunnel. The messages from policy makers have been key to understanding the direction of the Chinese economy during the year. Although every year has its own particular characteristics, we see some historical patterns that are showing similar signals in 2021- 2022. As Mark Twain stated, History Doesn’t Repeat Itself but it often Rhymes. The current Russia/Ukraine conflict and its implications on the Chinese economy are risks we are closely monitoring.

[1] Source : Macquaire

[2] Source: Bloomberg and Macquaire

[3] China Should Eventually “Co-Exist” With Covid, Says Top Scientist (

Global Alpha Capital Management Ltd.
March 10th, 2022