KraneShares reports on 2021 China outlook


China ETF specialist firm KraneShares has prepared a detailed outlook for the state of China’s economy, capital markets, politics, and favourite themes for 2021. This comes as figures reveal that China’s economy grew 6.5 per cent in the fourth quarter of the year.

KraneShares writes that China’s first-in/first-out experience with the coronavirus resulted in a robust economic rebound and stock market rally in the latter part of 2020. 

“We believe that China can serve as a model for what may occur in other countries in 2021, as they also work to defeat the pandemic,” the firm says.

The MSCI China All Shares Index ended the year up 33.6 per cent, as opposed to 18.4 per cent for the S&P 500 Index, KraneShares reports.

“While the Western world had not experienced a pandemic in almost 100 years, China’s experience with the 2003 SARS outbreak led to the development of containment policies, including quarantines, social distancing measures, and mask wearing.”

The firm notes that each of these policies was introduced in China in January 2020, and now, China is a full three quarters removed from quarantine. 

“While China’s strong economic performance in 2020 will face year-over-year (YoY) comparisons beginning in the second quarter of 2021, the pace of economic growth should remain robust throughout the year,” the firm writes. 

The firm notes that China’s policy measures to control the pandemic helped China to lift its quarantine in Q2 2020 and maintain a V-shaped economic recovery. 

“This recovery continues today, as evidenced by economic data and the results of publicly traded companies. China implemented monetary and fiscal policy support while taking further measures, such as providing credit for businesses impacted and issuing bonds for infrastructure projects.”

KraneShares notes that these measures were very different from how China responded after the Global Financial Crisis (GFC) when it issued large amounts of debt to stimulate the economy. 

“This time, China’s economy is apt not to suffer from a debt-induced hangover as it did post GFC. It is crucial to note that interest rates were not cut in 2020, which is exceedingly rare across developed and emerging market countries. 

“China’s rate environment aided the renminbi’s performance versus the US dollar, euro, and other major currencies. The renminbi’s strength is likely to continue to benefit from its conservative interest rate policy. It is feasible that monetary policy measures could tighten in late 2021 to prevent the economy from overheating, though we believe the current support will be scaled back incrementally. Chinese exports will also face a high hurdle in YoY comparisons in 2021, having been driven by strong demand for health care exports such as Personal Protective Equipment (PPE) and ventilators while work from home (WFH) drove demand for computers, laptops, and iPhones. Exports of health care and WFH goods are likely to decrease in 2021 while demand for traditional exports picks up.”

In conclusion, KraneShares writes: “As we enter 2021 with high hopes of the pandemic gradually receding, there are signs of economic progress happening around the world. 

“Moreover, fields such as health care, clean technology, electric vehicle, consumer technology, and fintech seem to have experienced an inflection point in 2020. We are certainly encouraged by the return of diplomacy between the world’s largest economies in 2021. 

“Political stability and a mindset of cooperation and inclusion could certainly help spur global growth and innovation. We believe this year looks even brighter than last year, and China could serve as a model for what may occur in other countries in 2021.”

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