In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.
The mainstream financial media mistakenly uses the term of animal spirits to encapsulate all forms of capital spending. While the COVID-19 pandemic temporarily crushed animal spirits, projects receiving prior approval simply had their start dates delayed. Non-commodity capital spending has remained resilient during the pandemic and will register robust gains in 2021.
China’s rise as an economic power means that Asia Pacific corporates are the main contributors to global capital spending, while Europe and North America’s share has declined significantly. Improved commodity prices means that Latin America should register strong capital spending in 2021, while Europe should make its significant improvement since 2006.
Structural factors forcing companies to invest in digital technology and environmentally-friendly production techniques will persist and help to underpin capital spending in the aftermath of the COVID-19 pandemic. Higher capital spending in the semiconductor sector will alleviate product shortages across various end users, but there are fears that higher investment will come on stream after demand rolls over producing another supply glut similar to 2018.
The pandemic has created great hype about the need for companies to invest in intangible assets, thereby further casting doubt on the relevance of the Q-ratio as a measure of equity valuation. US data indicates that equipment and structures still dominate aggregate capital spending and even technology companies need to undertake sizeable investment in tangible assets to conduct business.
Cyclical forces, notably in the US, will also determine the outlook for capital spending, particularly if there are risks of policy mistakes to counter higher inflation. High corporate cash levels have traditionally been supportive for capital spending, but difficulty in finding worthwhile long-term projects since the financial crisis has raised the ante on companies to deploy cash in merger & acquisitions, as well as share buybacks.