Focus on: China

Three initiatives for further growth in the year of the ox

February 12 is the start of the year of the ox, according to the Chinese lunar calendar. The ox, which is the second of all zodiac animals, is known for diligence, dependability, strength and determination. China’s ambitious policies are built on these qualities.

The Covid-19 pandemic and its consequences have not yet been fully overcome in China. Nevertheless, there are many indications that the rituals of the New Year celebrations, which are supposed to bring luck and prosperity in the coming year, will fall on fertile ground. The country has not only come through the pandemic very well in the past year: The gross domestic product grew by 2.3 per cent and exceeded the 100 trillion yuan mark for the first time. DWS is also extremely positive about the prospects for 2021 and beyond. China has already overtaken the European Union in terms of economic output: its share of global gross domestic product is 18 percent. That is currently second place behind the U.S., which has 27 percent.

Share of global export market reaches record 14 percent
A second figure shows how well the Chinese economy has come through the Covid-19 pandemic: its share of the global export market has risen to a record 14 percent. This shows another of China's strengths: its flexibility. When global demand for medical equipment to combat Covid-19 and for electronic devices for home office work skyrocketed, the Chinese economy was on hand when many Western industrialised countries could not deliver. To be sure, the situation is likely to normalise in 2021. Nevertheless, China should be able to defend its strengthened position.

Five-year plan: Three initiatives to further increase economic strength
The course is set for further growth, thanks to the fourteenth Five-Year Plan, which will come into force in March. President Xi wants to push innovation and new technologies to strengthen China's competitiveness and redefine its role in world trade. In doing so, he is focusing on three core areas. First: further expansion of digitalisation and e-commerce. Second, the consistent orientation of the Chinese economy to massively reduce its dependence on foreign value chains in strategically important areas. Thirdly, the first commitment to prioritise the fight against climate change. China is thus consistently taking the path towards higher-quality and more sustainable growth.

Digitalisation improves productivity
The enormous impact of the huge progress in digitalisation on the country's growth can be illustrated very well by one figure: Every one percent increase in digitisation improves productivity by 0.3 to 0.4 percent. This ratio is impressive in itself. If you put it in the context of the situation in the U.S. or Europe, which have not managed to increase their productivity for quite some time, the significance of this development becomes even clearer. The number of patent applications also testifies to the innovative capacity of the Chinese economy: in terms of both number and growth rate, it is leading the U.S.

Another very important component is the self-sufficiency of its own economy. China is working mightily to reduce its dependence on other countries. For example, China currently produces about 30 per cent of the chips for the semiconductor industry itself, while 70 per cent are purchased from abroad. In just five years, the ratio is to be reversed: 70 per cent domestic production, only 30 per cent sourced from abroad.

The third focus of the new five-year plan, the first-ever focus on environmental issues, should also give the economy a boost. By 2025, every fifth new car registered in China is to be an electric car. By 2060, China wants to have a carbon neutral economy.

Positive outlook for equity and bond markets
What do these developments mean for the capital markets? Our outlook is basically very positive, for equities as well as for bonds.

The equity markets have already performed very well in 2020, led by growth stocks from the e-commerce and internet sectors. In 2021, we are focusing more on cyclical and value stocks, where we see greater potential this year. In the medium term, we consider Chinese technology and e-commerce companies as well as companies from the education and consumer sectors to be very promising. Many companies in these areas should benefit from China's further expansion in the new economy.

However, we also sees opportunities in bonds. Yields of around three percent for government bonds are a good argument in today's low interest environment. In addition, we consider the risk of high currency fluctuations to be low. An assessment that is by no means true for all promising emerging markets. Also interesting: selected corporate bonds that have a significant yield premium over comparable U.S. corporate bonds.

Politics, especially the relationship with the U.S., remains a factor of uncertainty. The new administration under U.S. President Biden will probably not treat China with kid gloves and will critically address the issue of democracy. However, its actions are likely to be much more predictable than those of the previous administration.
Competition and power-tuning – that will once again determine the relationship between the two great powers this year. But it should be clear to everyone: the Chinese ox is a serious competitor, now and in the future.

Sabina Diaz Duque
+49 (0)69 / 910 14177

Reimar Salzmann
+49 (0)69 / 910 14191

About DWS Group
DWS Group (DWS) is one of the world's leading asset managers with EUR 793bn of assets under management (as of 31 December 2020). Building on more than 60 years of experience, it has a reputation for excellence in Germany, Europe, the Americas and Asia. DWS is recognized by clients globally as a trusted source for integrated investment solutions, stability and innovation across a full spectrum of investment disciplines.

We offer individuals and institutions access to our strong investment capabilities across all major asset classes and solutions aligned to growth trends. Our diverse expertise in Active, Passive and Alternatives asset management – as well as our deep environmental, social and governance focus – complement each other when creating targeted solutions for our clients. Our expertise and on-the-ground-knowledge of our economists, research analysts and investment professionals are brought together in one consistent global CIO View, which guides our investment approach strategically.

DWS wants to innovate and shape the future of investing: with approximately 3,500 employees in offices all over the world, we are local while being one global team. We are investors – entrusted to build the best foundation for our clients’ future.


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