Alexis Bienvenu

Year of the Dragon: the Return?

By Alexis Bienvenu, Fund Manager, La Financière de l’Échiquier (LFDE) | October 2024

A civilization four thousand years old has the luxury of time to grow in power. That is why China – faced since its post-Covid economic reopening with a lack of growth, a severe housing crisis and a loss of consumer confidence – found itself sinking deeper into economic and stock market stagnation before suddenly, during the aptly-named Year of the Dragon, pulling out all the stops. The authorities announced a salvo of economy-supporting measures over the course of three days at the end of September, strategically timed just before the traditional Chinese Golden Week celebrating the beginning of communist rule. These measures ignited the market, with local stocks soaring by nearly 25% in a week. This greatly profited Chinese equity strategies such as those managed by La Financière de l’Échiquier (LFDE), which returned to the spotlight overnight. The blaze spread to Western markets, where certain stocks linked to the Chinese economy became fired up.

It cannot be denied that China’s plan is a powerful one, contrary to the measures drop-fed into the economy over the last two years. Because it’s not just about the money. The plan consists of five mutually-linked components: monetary, banking, real estate, fiscal and financial – even a communist regime has to pamper the stock market, an essential tool for economic power!

Additionally, the plan shows a greater maturity than previous relief efforts, particularly in comparison with the gigantic plan of November 2008, which was mainly centred around infrastructure construction. Both the resulting inflation and the property bubble for which it was a catalyst led to inequality. Some of this inequality – particularly real estate excesses – is right at the origin of the current difficulties.

To achieve this significant shift, China needed the inadvertent aid of its competitors, in particular the United States, to allow it to accomplish two things. Firstly, by triggering a price war under the Trump presidency, the USA forced China to reexamine its economic priorities. With China’s exports partly constrained, as well as some of its strategic imports, such as highly advanced electronic components, the Middle Kingdom could no longer simply rely on increasing its exports to enrich itself. This made it all the more urgent to boost domestic consumption, an aspect that the recently published plan is tackling head-on. Secondly, the statements about monetary easing made by the US Federal Reserve (Fed) on 18 September have enabled China to cut its key interest rates without the risk of excessively weakening its currency against the dollar, which would eventually lose the support provided by high US interest rates. It is perhaps no coincidence that the Chinese announcements came several days after the Fed’s, rather than before.

As a patient observer of western change, China could not fail to learn from the economic ups and downs of its competitors-cum-customers. In doing so, it will in return be providing aid – albeit unwittingly – to a part of the Western economy, especially the European economy, which depends on its good health. But if it is to move up another notch among the nations, despite competition from India and the appetite of the United States, new reforms must be swiftly implemented, particularly to deal with its declining population. Only then will the “Year of the Wood Dragon” be able to launch the decade leading up to the “Year of the Fire Dragon” in 2036, followed by the major milestone of the centenary of the People’s Republic of China in 2049. Given the current example, there is little doubt that the dragon will continue to breathe fire – or spit out healing water, according to local tradition.

The opinions expressed reflect the views of the author. LFDE shall not be held liable for these opinions. Securities and sectors are provided as examples. Their inclusion in the portfolio is not guaranteed. Final version of 04 October 2024.