Investors looking to gain exposure to the Chinese economy are all-too aware of the threat of regulatory actions after a number of government-initiated crackdowns took the market by surprise and led to share price crashed.
But the country is investible if the cycle of regulation is understood, Iain Cunningham told FTAdviser, as it works in tandem with the credit cycle.
“[The Chinese authorities] do not do interest rate policy like we do in the US or UK…they just tell the banks to lend more or less money, where to lend it and where to not lend it, and so China’s economy tends to get driven by a credit cycle.”
Typically, the regulatory cycle comes on top of that, he said.
“Whenever the economy looks pretty good, as it did heading into 2021, [the authorities] tend to enact policies to address longer-term structural issues that they perceived to be in place.
Through the back end of last year we were accumulating positions in that part of the worldIain Cunningham
“The regulatory cycle tends to get very quiet when the economy is weakened,” Cunningham said, as the Chinese government wants to improve confidence.
“Actually, you have seen them walking back on the macro prudential measure they put on the housing market and property developers.
"The language associated with internet platforms in the private sector has become far more supportive relative to where it was 18 months ago.”
The flip side of this is that when the economy improves, there will then be a high probability of new regulatory crackdowns.
For Cunningham, who invests counter-cyclically, this means buying assets with longer-term tailwinds that are attractively valued and have cyclical and policy support behind them.
“Through the back end of last year we were accumulating positions in that part of the world because valuations were attractive and policymakers were indicating that the regulatory cycle was peaking.
“We believe there will be a period of time for say, one to two years where it is attracting to own and run those assets, and then should we get to a point when [assets are] more expensive, the economy has recovered, and policymakers indicate the are going to tighten again, we [will] significantly reduce our exposure.”
Future proofing
Cunningham outlined the key forces that he thinks will shape the next financial cycle.
“Some of those big forces [include] China's rise…we are seeing increasing pushback on that globally, which is causing elements of de-globalisation, particularly for national security reasons.”
