January 24, 2024 | Cross-Team
Portfolio Manager
Portfolio Manager
View Fund:
https://im.williamblair.com/investments/sicav-funds/lu2093691256-emerging-markets-debt-hard-currency-fund
View Fund:
https://im.williamblair.com/investments/sicav-funds/lu2093699408-emerging-markets-debt-local-currency-fund
China’s government is finally moving to stimulate the economy after its sluggish post-COVID reopening. The country faces a slew of problems, including low consumer confidence, plummeting property sales, and high youth unemployment. Even if the government succeeds in reviving the economy, investors may have to come to terms with structurally lower growth, a backdrop that calls for a much more selective approach to China’s equity markets.
Vivian: The main reason China hasn’t followed the post-COVID path of other countries is that consumer and business confidence is at an all-time low. This is understandable. The country was in lockdown for four years, longer than the rest of the world, and then saw a series of stop-start openings.
In addition, many Chinese tie their wealth to their property holdings, and property markets have experienced a severe downturn, with new home floor-space sales down 20% to 30% in 2023 following a 30% to 40% decline in 2022. This has created a negative wealth effect.
Weak employment and income recovery post-reopening has further exacerbated low confidence levels. The propensity to consume has been severely curtailed, and people have kept saving instead of spending.
The lack of a government stimulus has also not helped. In a confidence-led downward spiral, you need money to come in and jumpstart the real economy. It was not until recently that the government came out with a meaningful stimulus—a 1 trillion renminbi package announced in October 2023.
The consumer segment will be critical as we look to 2024.
The absence of effective countercyclical measures over the past year is partly explained by the fiscal weakness of local governments. Their finances were damaged by the huge cost of managing COVID and the decline in land sales, which tend to be the biggest source of local government revenue.
Another factor is a marginal shift of leadership’s focus away from economic growth toward structural reforms. And, of course, the Chinese economy is just bigger now, which makes it harder to stimulate.
Our view is that we are now at a cyclical bottom and will see a gradual economic recovery as stimulus flows through and as the base effect, or year-ago comparison, gets more favorable.
Clifford: I agree with this. At the time of this writing, it looks as if we are still on track to achieve 5% GDP growth in 2023. At the same time, we see many pockets of weakness.
Manufacturing has been disappointing. The service sector is expanding, but at a slow pace. Exports have dragged, partly due to a soft global economy. Fixed asset investment has been weak. Private investors, domestic and global, appear to be concerned about regulatory risk. We think this is behind us, but it takes time to rebuild confidence.
Credit demand has also been weak, especially demand for longer-term credit, reflecting a lack of confidence. But the numbers are slowly improving after government efforts to boost the demand side of the property market, which include cutting mortgage rates and reducing banks’ reserve requirement ratios.
The 1 trillion renminbi stimulus package could be a game-changer, but there are a lot of holes to fill. One of those holes is a looming crisis in local government financing vehicles (LGFVs), which are private companies that borrow money from investors to fund local government initiatives. LGFVs’ indebtedness could become a systemic risk if it is not carefully handled. It has grown too big for the central government to address with just a “debt-to-equity-swap” solution. It could weigh on economic growth for some time.
Despite all this, we expect the economy to perform better in 2024 because it will be coming off such a weak base.
Vivian: In late October, China announced it will issue 1 trillion renminbi in special central government bonds and transfer the funding directly to local governments to support infrastructure investments and post-disaster recovery amid recent floods in certain areas. The first tranche, 500 billion renminbi, will be disbursed and deployed by the end of 2023 and the rest in 2024.
The magnitude of this stimulus package and its fast deployment indicate the government’s determination to stabilize the economy. This stimulus should help strengthen local governments’ fiscal stability, stimulate the real economy, and repair consumer and business confidence, although the impact could be more gradual.
Clifford: To be clear, the government is not aiming to use stimulus money to directly support the property market. It is trying to address the fallout from local governments being so dependent on land sale revenues in the past. Property market support will likely be second order and include lowering mortgage rates, redefining mortgage terms, and granting preferential credit. It is not the government’s priority to protect struggling property developers from their creditors.
Vivian: The recent U.S. executive order was aimed at preventing China from advancing in three key fields with national security implications: semiconductors, artificial intelligence, and quantum computing. One major move has been to block China’s access to high-performance semiconductor chips and related semiconductor equipment. The United States has been sanctioning and restricting China’s technology advancement for some time and has steadily tightened restrictions to capture not just cutting-edge technology but a much wider range of technologies.
However, many Chinese companies have continued to push forward and even accelerated their pursuit of technology advancement by already producing advanced chips. While sentiment on this issue is negative, the real impact on Chinese companies is probably less than people expect. It will likely be felt more by global technology companies who supply China.
Vivian: Global investor sentiment towards China deteriorated in 2023. The United States and China are strategic competitors and that is unlikely to change. With every passing year, it plays out in different ways, but from an investor perspective, sentiment seems to be getting worse.
This shows up in a rising Chinese equity risk premium. Chinese equities derated tremendously in 2023. It was partly due to the cyclical downturn and partly due to lingering structural issues, but it was also due to increased geopolitical concerns. As a result, the discount rate, or risk premium, for Chinese equities is higher. That could be hard to reverse without the improvement of any of the three factors mentioned above.
Vivian: We have seen value strongly outperform growth for the past two years, given the weak and uncertain growth outlook of the Chinese economy, rising interest rates globally, and a risk-off mentality amid geopolitical risks and conflicts. This is a challenging backdrop for quality growth investors.
Although it is difficult to predict how this environment will shift, we continue to find and look for attractive companies and stocks with idiosyncratic drivers. As China’s economic growth structurally decelerates, we believe Chinese equity investment is becoming more of a bottom-up, stock-picking play than a top-down beta play.
The consumer segment will be critical as we look to 2024. If consumption revives and retail sales recover, this could be a bright spot, especially for companies with pricing power, strong brand positioning, and an unchanged structural growth story.
In industrials, high-end manufacturing continues to look attractive. Some sub-industries experienced near-term slowdowns linked to weaker end-markets in electric vehicles, green energy, and semiconductors, but they are structurally strong. On the other hand, industrial machinery is more of a cyclical recovery story. It has a natural replacement cycle that was interrupted during COVID, so there is pent-up demand.
The 1 trillion renminbi stimulus package could be a game-changer, but there are a lot of holes to fill.
In tech hardware, the Chinese semiconductor industry is seeing improved fundamentals after a down cycle in the last couple of years. This was primarily due to weakness in end-demand for consumer electronics and smartphones driven by a poor product cycle (similar to global smartphone markets), sanction-led supply constraints, and reduced consumer confidence and purchasing power as a result of prolonged COVID lockdowns.
However, as third-quarter results come in, we are seeing early signs of a sequential order recovery and cycle bottoming. Over the long term, we believe the Chinese domestic semiconductor industry remains attractive, driven by structural share gains of domestic players considering their technology advancements.
Equity market performance in 2024 will depend on economic recovery, in our opinion. Many factors will need to align—confidence must improve, income to lower urban population groups must recover, and property markets must stabilize. In addition, employment needs to rise, especially youth employment, which has been depressed by both weakness in the service sector due to an anemic economic reopening and in the internet industry due to regulatory measures.
Clifford: Our bond-market view is driven by our outlook for China’s economic growth. We expect it to be better going forward, but not dramatically so. As a result, interest rates are unlikely to rise significantly. If anything, the government has reason to maintain low interest rates to keep financing costs affordable. Similarly, inflation does not seem to be a risk based on the latest numbers.
When it comes to investing in the Chinese bond market, we believe you must look at it in relative terms. At the time of this writing, the benchmark 10-year Chinese government bond is trading below 2.7%, whereas the U.S. Treasury 10-year bond has moved up to the mid- to high-4% range. That is more than 200 basis points of negative carry for a dollar-based investor.
Perhaps one of the best opportunities could be for funds that deal in distressed debt.
We see little opportunity for capital gain other than miniscule carry gain, given China’s low interest rates. That leaves the currency element as a source of potential profit for global investors. But we don’t see major upside in the renminbi—the 12-month forward implied yield of CNH (the offshore renminbi) is less than 3%.
Perhaps one of the best opportunities could be for funds that deal in distressed debt. Most of the Chinese distressed property bonds are trading at single cents on the dollar. If there is some major turnaround in the Chinese property market, it is possible to imagine appreciation from these low levels leading to outsized benefits for investors.
But we aren’t anticipating that the government will try to revive the property sector. In our opinion, it is more likely that it will continue to let the sector consolidate and de-lever in a market-driven way.
Vivian Lin Thurston, CFA, partner, is a portfolio manager on William Blair’s global equity team.
Clifford Lau, CFA, is a portfolio manager on William Blair’s emerging markets debt team.
Part 1 | Economy Hits Cruising Altitude, But Beware of Bumps
Part 2 | Emerging Markets Diverge as a New Cycle Unfolds
Part 3 | EM Debt: From Headwinds to Tailwinds
Part 4 | Restarting China's Economic Growth
The MSCI All Country (AC) Asia ex Japan Index captures large- and mid-cap representation across two of three developed markets (excluding Japan) and eight emerging markets in Asia. The MSCI China Index captures large- and mid-cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (such as ADRs). The MSCI Emerging Markets (EM) Index captures large- and mid-cap representation across 27 EMs.
Indices are unmanaged and do not incur fees or expenses. A direct investment in an unmanaged index is not possible.
View Strategy:
https://im.williamblair.com/investments/separate-accounts/china-a-shares-growth
View Strategy:
https://im.williamblair.com/investments/separate-accounts/china-growth
View Strategy:
https://im.williamblair.com/investments/separate-accounts/emerging-markets-debt
View Strategy:
https://im.williamblair.com/investments/separate-accounts/emerging-markets-debt-hard-currency
View Strategy:
https://im.williamblair.com/investments/separate-accounts/emerging-markets-debt-local-currency
Want the latest insights on the economy and other forces shaping the investment landscape?
Subscribe to our Investing Insights newsletter.
Any investment or strategy mentioned herein may not be appropriate for every investor. There can be no assurance that investment objectives will be met. Products and services listed are available only to residents of this jurisdiction and may only be available to certain categories of investors. The information on this website does not constitute an offer for products or services, or a solicitation of an offer to any persons outside of this jurisdiction who are prohibited from receiving such information under applicable laws and regulations. Nothing on this webpage should be construed as advice and is therefore not a recommendation to buy or sell shares.
Please carefully consider the William Blair Funds’ investment objectives, risks, charges, and expenses before investing. This and other information is contained in the Funds’ prospectus and summary prospectus, which you may obtain by calling 1-800-742-7272. Read the prospectus and summary prospectus carefully before investing. Investing includes the risk of loss.
The William Blair Funds are distributed by William Blair & Company, L.L.C., member FINRA/SIPC.
The William Blair SICAV is a Luxembourg investment company with variable capital registered with the Commission de Surveillance du Secteur Financier (“CSSF”) which qualifies as an undertaking for collective investment in transferable securities (“UCITS”). The Management Company of the SICAV has appointed William Blair Investment Management, LLC as the investment manager for the fund.
Please carefully consider the investment objectives, risks, charges, and expenses of the William Blair SICAV. This and other important information is contained in the prospectus and Key Investor Information Document (KIID). Read these documents carefully before investing. The information contained on this website is not a substitute for those documents or for professional external advice.
Information and opinions expressed are those of the authors and may not reflect the opinions of other investment teams within William Blair Investment Management, LLC, or affiliates. Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Information is current as of the date appearing in this material only and subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. This material may include estimates, outlooks, projections, and other forward-looking statements. Due to a variety of factors, actual events may differ significantly from those presented.
Investing involves risks, including the possible loss of principal. Equity securities may decline in value due to both real and perceived general market, economic, and industry conditions. The securities of smaller companies may be more volatile and less liquid than securities of larger companies. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks. These risks may be enhanced in emerging markets and frontier markets. Investing in the bond market is subject to certain risks including market, interest rate, issuer, credit, and inflation risk. High-yield, lower-rated, securities involve greater risk than higher-rated securities. Different investment styles may shift in and out of favor depending on market conditions. Diversification does not ensure against loss.
Past performance is not indicative of future returns. References to specific companies are for illustrative purposes only and should not be construed as investment advice or a recommendation to buy or sell any security.
William Blair Investment Management, LLC is an investment adviser registered with the U.S. Securities and Exchange Commission.
Issued in the United Kingdom by William Blair International, Ltd., authorized and regulated by the Financial Conduct Authority (FCA), and is only directed at and is only made available to persons falling within articles 19, 38, 47, and 49 of the Financial Services and Markets Act of 2000 (Financial Promotion) Order 2005 (all such persons being referred to as "relevant persons").
Issued in the European Economic Area (EEA) by William Blair B.V., authorized and supervised by the Dutch Authority for the Financial Markets (AFM) under license number 14006134 and also supervised by the Dutch Central Bank (DNB), registered at the Dutch Chamber of Commerce under number 82375682 and has its statutory seat in Amsterdam, the Netherlands. This material is only intended for eligible counterparties and professional clients.
Issued in Switzerland by William Blair Investment Services (Zurich) GmbH, Talstrasse 65, 8001 Zurich, Switzerland ("WBIS"). WBIS is engaged in the offering of collective investment schemes and renders further, non-regulated services in the financial sector. WBIS is affiliated with FINOS Finanzomubdsstelle Schweiz, a recognized ombudsman office where clients may initiate mediation proceedings pursuant to articles 74 et seq. of the Swiss Financial Services Act ("FinSA"). The client advisers of WBIS are registered with regservices.ch by BX Swiss AG, a client adviser registration body authorized by the Swiss Financial Market Supervisory Authority ("FINMA"). WBIS is not supervised by FINMA or any other supervisory authority or self-regulatory organization. This material is only intended for institutional and professional clients pursuant to article 4(3) to (5) FinSA.
Issued in Australia by William Blair Investment Management, LLC (“William Blair”), which is exempt from the requirement to hold an Australian financial services license under Australia's Corporations Act 2001 (Cth). William Blair is registered as an investment advisor with the U.S. Securities and Exchange Commission (“SEC”) and regulated by the SEC under the U.S. Investment Advisers Act of 1940, which differs from Australian laws. This material is intended only for wholesale clients.
Issued in Singapore by William Blair International (Singapore) Pte. Ltd. (Registration Number 201943312R), which is regulated by the Monetary Authority of Singapore under a Capital Markets Services License to conduct fund management activities. This material is intended only for institutional investors and may not be distributed to retail investors.
Issued in Canada by William Blair Investment Management, LLC, which relies on the international adviser exemption, pursuant to section 8.26 of National Instrument 31-103 in Canada.
The content contained in this site is intended as informational or educational in nature and does not constitute investment advice or a recommendation of any investment strategy or product for a particular investor. Investment advice and recommendations can be provided only after careful consideration of an investor’s objectives, guidelines, and restrictions. Investors should consult a financial professional/financial consultant or investment adviser before making any investment decisions. Investing includes the risk of loss.
Copyright © 2026 William Blair. William Blair is a registered trademark of William Blair & Company, L.L.C. “William Blair” refers to William Blair Investment Management, LLC and affiliates.
