BACK TO THE BOUTIQUE INVESTOR BLOG China Signals Growth Despite Global Downturn and Geopolitical Tensions Kasia Kiladis ASIAN AND GLOBAL EQUITIES INVESTMENT SPECIALIST | VERITAS ASSET MANAGEMENT Despite the recent chill in U.S.-China relations, both countries remain top trading partners and have insisted they do not want a new Cold War. With tensions on the rise, both superpowers are accelerating their plans to reduce economic interdependence, which has been built over many decades. While President Xi Jinping recently asked his government to prepare for greater self-reliance, the U.S. and its allies reoriented their supply chains, denying China the opportunity to dominate in strategic goods such as advanced chips. Trade Continues Despite Hostility Trade conflicts between the two nations are not new. Imports of certain products from China such as semiconductors, IT hardware, and consumer electronics have fallen dramatically since the implementation of trade tariffs by the Trump administration in 2018. At the same time, imports from China, including laptops and computer monitors, phones, video game consoles, and toys, are higher than ever: U.S.-China trade hit a new record in 2022.1 Total imports and exports grew 2.5% year-over-year to reach $690.6 billion, breaking the previous record of $658.8 billion set in 2018. The U.S. trade deficit with China also expanded by 8.3% year-over-year to reach $382.9 billion in 2022. The latest figures indicate that demand from consumers and businesses remains high despite worsening trade relations. Even if policymakers foresee long-run benefits in disentangling the two economies, their choices come with immediate costs. These include product shortages as supply chains struggle to adjust to inflation, and as companies find it expensive to establish new suppliers. As a result, any decoupling is likely to happen over several years, giving way to investment opportunities supported by the long-term trend of “self-reliance.” Growth Outlook for China In early March 2023, the National People’s Congress convened for China’s Annual Two Sessions meeting. On the first day, outgoing Chinese Premier Li Keqiang delivered the Annual Government Work Report, one of the most important policy documents of the year. In addition to setting China’s GDP target for 2023, the report outlined policies and goals for boosting China’s economic growth for the year. The government announced a GDP growth target of “around 5%” for 2023, which was lower than expected. Considering China’s strong economic recovery in the first two months of the year, with Manufacturing PMI increasing to 52.6, an increase of 2.5 percentage points from the previous month, and Non-Manufacturing PMI increasing to 56.3 from 54.4 in February, the modest GDP growth target suggests that China will put more emphasis on high quality growth rather than aiming for the breakneck growth seen in previous years. Despite the lower-than-expected growth target, China will remain one of the world’s fastest-growing major economies, while the U.S. and EU face recession risks. Looking Ahead China’s economic growth in 2023 will be led by several key industries. Industries including tourism, new energy vehicles (NEVs), online shopping, software development, and healthcare are expected to prosper after the lifting of COVID restrictions and government support and incentives that do not rely on foreign trade. The tourism and entertainment industry is expected to rebound dramatically as pent-up demand after stringent lockdown policies will continue to provide long-term tailwinds. In addition, the demand for industry services such as those in hotels and restaurants is expected to increase. NEVs and automobile manufacturing industries in China have also seen rapid growth, driven by the central government’s supportive policies, growing environmental concerns, the increased number of charging stations, and decreased operating costs. The China Association of Automobile Manufacturers predicts that China’s NEV sales in 2023 will grow by 35% year-over-year to nine million units. It also helps that China is the world’s leading lithium-ion battery manufacturer, as these are used in most electric cars. As a result, any decoupling of the two economies will bring challenges, but investment opportunities will continue to emerge as China shifts toward self-reliance and focuses on high quality growth. EXPLORE MORE PERSPECTIVES ON CHINA 1 U.S. Bureau of Economic Analysis Past performance is not a guarantee of future results. Diversification does not guarantee a profit or protect against a loss in declining markets. Investing involves risk including possible loss of principal. There is no guarantee that these investment strategies will work under all market conditions, and each investor should evaluate their ability to invest for a long term, especially during periods of downturns in the market. This represents the views and opinions of Veritas Asset Management. It does not constitute investment advice or an offer or solicitation to purchase or sell any security and is subject to change at any time due to changes in market or economic conditions. The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader theme. Data is from what Veritas believes to be reliable sources, but it cannot be guaranteed. 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