Three trends to watch in the Chinese New Year

Keep it brief

  • 2020 – the Year of the Rat – marks the start of a new 12-year zodiac cycle and a new decade. We look ahead to potential drivers of future growth in China, following decades of rapid expansion.
  • Economic and societal goals, a pause in US-China trade tensions, and continued technological innovation could fuel the next leg of Chinese growth and provide opportunities for international investors.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. You may not get back the amount originally invested.

For those celebrating the Lunar New Year around the world, 2020 is the Year of the Rat, the first of the 12-year cycle of animals that name the years. In Chinese mythology, a race was held to determine the rank of the twelve Chinese zodiacs. You might be wondering how could the tiny creature beat tigers and dragons to win the first-place honour?  Legend has it that the Rat tricked the Ox into giving him a ride in the race, and as they arrived at the finish line, the Rat jumped down and landed ahead of the Ox.

Coincidentally, 2020 marks both the start of a new decade and a 12-year cycle in the lunar calendar. For investors, then, this could be a good time to look ahead to the drivers that could shape China’s economy this year and beyond.

The year of xiaokang?

In 1978, Deng Xiaoping, then leader of the People’s Republic of China, used the term xiaokang – meaning ‘moderately prosperous’ – to describe an eventual target state for a middle-class Chinese society. The term was revived by President Hu Jintao, who announced a goal to achieve xiaokang by doubling GDP in real terms between 2010 and this year.

Graph: China’s growth rate - Source: World Bank, as of Jan 2020

Source: World Bank, as of Jan 2020.

To reach this goal, China’s GDP would need to grow by an average of 6.2% across 2019 and 2020.1 The economy grew 6.1% last year,2 with trade tensions and a global growth slowdown presenting challenges, but signs of improvement on these fronts could aid a pickup in Chinese growth and bring the economy close to its xiaokang target.

From phased to phase one

US-China trade tensions weighed on sentiment towards Chinese assets in 2019, particularly over the latter half of the year, but the signing of a phase one trade deal in mid-January should remove some uncertainty until the US election. We believe both sides are incentivised to keep trade tensions on pause for now and see China’s economy stabilising as a result amid a global growth recovery. Any reescalation in tensions would present a risk to our outlook, but this is not our base case.

Global flows into Chinese equity exchange-traded products, 2018-2020

Graph: Global flows into Chinese equity exchange-traded products, 2018-2020

Source: BlackRock and Markit, as of 20th January 2020. Past flows into global ETPs are not a guide to current or future flows and should not be the sole factor of consideration when selecting a product.

Tech-ing it easy

Despite a recent pause, tensions between the US and China are likely to persist in the long run, especially with regards to technology. At the same time, China’s technological advancement is continuing. In recent years, the country has placed a higher strategic priority on domestic technological research and innovation. In 2018, China accounted for nearly half of global patent filings, with a record 1.39 million applications.3 Effective commercialisation and integration of these innovations could drive the next phase of economic growth, and present opportunities for international investors seeking to diversify exposure to global technology leaders.

China’s patent push

Graph: China’s patent push - Source: Refinitiv DataStream, as of January 2020

Source: Refinitiv DataStream, as of January 2020.

1Source: The Economist, December 2019.
2Source: Bloomberg, as of January 2020.
3Source: Refinitiv DataStream, as of January 2020.

MKTGH1219E-1063493