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By accessing the restricted area I confirm my agreement with‚ and understanding of‚ the following terms of use and the legal provisions. If I do not agree to the terms and legal conditions‚ I must not access this website or any pages thereof. I acknowledge that access to the information contained on this website is available to "Qualified Investors" only as defined below. A private individual or legal representative or any other party without this qualification should not enter this website.

By accessing this website or any of its pages‚ I confirm that I am a qualified investor in accordance with Art 10.3 CISA.

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I understand the information contained in this website is not directed at, nor is it intended for distribution to, or use by, persons in any jurisdiction in which the dissemination of such investment related information is not permitted. I also understand that the information contained in this site is not directed to any party that may be defined as a ‘retail investor’ by the home regulator of the country in which the website is being accessed. I understand that the information or opinions contained herein should not be construed as an offer to sell or the solicitation of an offer to buy any investment product nor shall any such investment products or services be offered or sold to any person in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful. Fidelity has expressed its own views and opinions on this website, and these may change and there is no obligation to update them. Nothing in this website should be construed as investment, tax, legal or other advice. The information contained herein is subject to change without notice.

I understand the information contained in this website is not directed at, nor is it intended for distribution to, or use by, persons in any jurisdiction in which the dissemination of such investment related information is not permitted. I also understand that the information contained in this site is not directed to any party that may be defined as a ‘retail investor’ by the home regulator of the country in which the website is being accessed. I understand that the information or opinions contained herein should not be construed as an offer to sell or the solicitation of an offer to buy any investment product nor shall any such investment products or services be offered or sold to any person in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful. Fidelity has expressed its own views and opinions on this website, and these may change and there is no obligation to update them. Nothing in this website should be construed as investment, tax, legal or other advice. The information contained herein is subject to change without notice.

This website has been issued by FIL Fund Management Limited, a Bermuda company licensed to conduct investment business by the Bermuda Monetary Authority. Neither FIL Fund Management Limited, its parent company FIL Limited, nor any of their group companies or affiliates makes or gives any warranty or representation that any information contained on this website is accurate, complete, or fit for any particular purpose.

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Riconosco che le informazioni contenute in questo sito web non sono dirette né sono destinate alla distribuzione o all’uso da parte di soggetti in qualsiasi giurisdizione in cui la diffusione di tali informazioni relative allinvestimento non è consentita. Riconosco inoltre che le informazioni contenute in questo sito web non sono dirette a soggetti che potrebbero essere definiti "investitori retail" dall'autorità di vigilanza nazionale del paese dal quale si accede al sito stesso. Riconosco che le informazioni o le opinioni contenute in questo sito web non devono essere interpretate come un'offerta di vendita o come la sollecitazione di un'offerta di acquisto di un prodotto o un servizio di investimento, né tali prodotti o servizi di investimento possono essere offerti o venduti a soggetti di giurisdizioni nelle quali tale offerta, sollecitazione, acquisto o vendita sarebbero illegali. Questo sito web contiene giudizi e opinioni espressi da Fidelity, che sono soggetti a modifica e rispetto ai quali non sussiste alcun obbligo di aggiornamento. Nulla di quanto contenuto in questo sito web va considerato come una consulenza di investimento, fiscale, legale o di altra natura. Le informazioni qui riportate sono soggette a modifica senza preavviso.

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I confirm that I am accessing this website for the purpose of acquiring information as, or for, an Institutional Investor (a corporate or other non-retail investor acting for their own account).

I understand the information contained in this website is not directed at, nor is it intended for distribution to, or use by, persons in any jurisdiction in which the dissemination of such investment related information is not permitted. I also understand that the information contained in this site is not directed to any party that may be defined as a ‘retail investor’ by the home regulator of the country in which the website is being accessed. I understand that the information or opinions contained herein should not be construed as an offer to sell or the solicitation of an offer to buy any investment product nor shall any such investment products or services be offered or sold to any person in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful. Fidelity has expressed its own views and opinions on this website, and these may change and there is no obligation to update them. Nothing in this website should be construed as investment, tax, legal or other advice. The information contained herein is subject to change without notice.

This website has been issued by FIL Fund Management Limited, a Bermuda company licensed to conduct investment business by the Bermuda Monetary Authority. Neither FIL Fund Management Limited, its parent company FIL Limited, nor any of their group companies or affiliates makes or gives any warranty or representation that any information contained on this website is accurate, complete, or fit for any particular purpose.

I acknowledge that neither FIL Fund Management Limited, FIL Limited, nor any of their group companies or affiliates will have any liability for any losses arising directly or indirectly from any information accessed from this website. By accepting this representation I also confirm my agreement to the website Terms and Conditions, which I have read and understood.

Please note that FIL Fund Management Limited is not licensed by the Liechtenstein Financial Market Authority (“FMA”) and is not subject to the supervision of the FMA.

Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited, a company existing under the laws of Bermuda.

If the above representation is correct, please click 'I agree' below to continue to the site.

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Hiermit bestätige ich, dass ich diese Website zur Informationsbeschaffung als institutioneller Anleger (ein auf eigene Rechnung handelndes Unternehmen oder ein anderer nicht als Privatanleger geltender Investor) bzw. für einen institutionellen Anleger besuche.

Mir ist bewusst, dass sich die Informationen auf dieser Website nicht an Personen richten bzw. für sie bestimmt sind, in deren Land die Verbreitung solcher anlagebezogenen Informationen nicht erlaubt ist. Mir ist ebenfalls bewusst, dass sich die Informationen auf dieser Website nicht an Adressaten richtet, die von der Aufsichtsbehörde in dem Land, von dem aus die Website besucht wird, möglicherweise als „Privatanleger“ klassifiziert werden. Des Weiteren ist mir bewusst, dass die hier zu findenden Informationen oder Meinungen nicht als Aufforderung zum Kauf oder Verkauf eines Anlageprodukts zu verstehen sind. Es sollen auch keine solchen Anlageprodukte oder Dienstleistungen Personen angeboten oder verkauft werden, in deren Land ein entsprechendes Angebot, eine Aufforderung, ein Erwerb oder Verkauf ungesetzlich wäre. Fidelity äußert auf dieser Website seine eigenen Ansichten und Meinungen, die sich jederzeit ändern können, ohne dass eine Verpflichtung zur Aktualisierung besteht. Kein Inhalt dieser Website ist als Beratung in Bezug auf Geldanlagen, Steuern, rechtliche oder sonstige Aspekte zu verstehen. Die hierin enthaltenen Informationen können sich ohne entsprechende Mitteilung jederzeit ändern.

Diese Website wurde von FIL Fund Management Limited eingerichtet, einem Unternehmen mit Sitz auf bzw. nach dem Recht der Bermuda-Inseln, das über eine Genehmigung der Bermuda Monetary Authority zur Ausübung von Investmenttätigkeiten verfügt. Weder FIL Fund Management Limited noch sein Mutterunternehmen FIL Limited oder irgendein anderes Konzernunternehmen oder verbundenes Unternehmen übernimmt die Gewähr dafür oder erklärt, dass die Informationen auf dieser Website zutreffend, vollständig oder für jedwede Zwecke geeignet sind.

Ich erkenne an, dass weder FIL Fund Management Limited noch FIL Limited oder ein anderes Konzernunternehmen bzw. verbundenes Unternehmen für etwaige Verluste haftet, die direkt oder indirekt aus einer auf dieser Website beschafften Information resultieren. Durch Annahme dieser Erklärung bestätige ich auch mein Einverständnis mit den Nutzungs- und Geschäftsbedingungen dieser Website, die ich gelesen und verstanden habe.

Fidelity International, das Fidelity International Logo und das F-Symbol sind Markenzeichen von FIL Limited, einem nach dem Recht der Bermuda-Inseln eingetragenen Unternehmen.

Bitte beachten Sie, dass die FIL Fund Management Limited von der Finanzmarktaufsicht Liechtenstein weder zugelassen noch beaufsichtigt ist.

Diese Website präsentiert Informationen in englischer und deutscher Sprache. Als professioneller Anleger akzeptiere ich hiermit, Informationen in mehr als einer Sprache zu erhalten.

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How to navigate China's economic lockdown

The Covid-19 coronavirus outbreak has delivered an exogenous shock to China’s economy, one that has ramifications for global growth. The depth of the damage will depend on how long activity remains suppressed, but the impact is transitory. For investors, the crucial variable is the scope of the stimulus response from Beijing.

19 February 2020

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What happens when the world’s second-biggest economy goes on temporary lockdown? For starters, domestic transport gridlock has disappeared as cities and towns quarantine anyone arriving from outside. Meanwhile, property sales collapsed over the Lunar New Year in an expected holiday lull. More worrying is that, weeks later, they still haven’t recovered.  

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The Covid-19 outbreak has delivered an exogenous shock to China’s economy, one that also has ramifications for global growth. 

But for investors trying to understand the severity and dimensions of the financial impact, and how to respond, it’s crucial to note two key variables: 1) the disruptions are temporary and will be largely reverse as activity resumes and the coronavirus outbreak is brought under control, and 2) policymakers are reacting with very aggressive stimulus measures. More on the latter shortly. 

Dimensions of economic impact

The novel coronavirus outbreak continues to spread in mainland China but the pace of new infections appears to be slowing. Still, how big the short-term blow to China’s overall economy will be depends on how long the disruptions last. There are signs in recent days that some factories and businesses are starting to come back online after nearly a month-long break, but across the country the situation is still far from business-as-usual.

For illustration, if China’s first quarter GDP growth fell to 4 per cent from 6 per cent, it would shave roughly half a percentage point from quarterly global output.  

The bottom line

We think the bottom line for Chinese policymakers trying to alleviate the economic impact from the virus outbreak is straightforward: stability comes first. 

This is a crucial year for the leadership in Beijing; by 2021, the 100th anniversary of the Party’s founding, China is meant to have become a xiaokang shehui, or a moderately well-off society (a term coined by Deng Xiaoping in the late 1970s). Jiang Zemin in 2002 added a goal of doubling annual GDP between 2010 and 2020, and Hu Jintao in 2012 added doubling household income targets by 2020 to the list. It falls on current president Xi Jinping to deliver on these, and against this backdrop we think China will try very hard in the coming quarters to make up for the growth lost in the first quarter due to the virus outbreak. 

Already, recent weeks have brought a steady drumbeat of new stimulus measures from policymakers. The People’s Bank of China injected $21 billion of liquidity via reverse repurchase agreements, while regulators and local governments are guiding financial institutions to ease lending policies to virus-affected regions. 

Measures so far can generally be characterised as short-term relief focused on helping small and medium-sized enterprises facing liquidity issues, or specifically targeting sectors or areas that have been hit hard by the outbreak. We have not seen much of the broader, scattergun-type stimulus that China deployed in the wake of the financial crisis in 2008-2009. In our view, this means that while the immediate priority is on delivering effective stimulus, China’s overall leverage level remains a policy concern.  

Room to manoeuvre

Fiscal constraints in China mean policymakers will need to perform a balancing act between injecting more stimulus and keeping the debt burden in check. On the face of it, China’s official national deficit is still conservative and has stayed below 3 per cent of GDP in recent years. But drilling deeper into the numbers, the fiscal pressures against further easing become clear.  

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Even with the exceptional measures to offset the virus impact, China’s headline national deficit is unlikely to rise much above 3 per cent this year. However, factoring in special bonds directly issued by provincial and regional governments, we project the augmented fiscal deficit will rise to around 6.5 per cent of GDP this year, up from 5.6 per cent last year - and this is before obligations incurred by quasi-official local government financing vehicles (LGFVs) are considered. 

There are also pressures on the revenue side. According to our analysis, last year was the first since 2015 in which the government missed its annual target for fiscal revenue; mainly the result of 2019’s generous tax and fee cuts. As a result, we see limited space for China to make further broad-based tax cuts in 2020.

The policy menu

Balancing the need to tread carefully, we think China still has ample room for further structural measures and monetary easing. The following list is not meant to be exhaustive but highlights our thinking around the broad range of options policymakers may opt to deploy: 

  • More incremental cuts to benchmark interest rates, including the MLF and the new loan prime rate (LPR), and to the reserve requirement ratio (RRR) for banks, freeing up cash for lending.
  • Helicopter money; for example, depositing cash directly into the bank accounts of residents Wuhan, the city at the epicentre of the outbreak, or perhaps all of Hubei province.
  • Potential support for the systemically important real estate sector, such as delaying payment for taxes and land premium, lowering the deposit ratio for land auctions, delaying project delivery, or calling for banks' support on existing loans.
  • A deposit rate cut, which would support bank net interest margins.
  • Pausing curbs on wealth management products for companies to ease cashflow and liquidity pressures.

Implications for investors

Risk assets sold off sharply in China and around the world in late January and early February but have since regained nearly all their lost ground. The market appears to be looking beyond any near-term fallout from the coronavirus outbreak, and investors are clearly sanguine on the outlook for Chinese stimulus yet to be unleashed. However, we think the picture is more nuanced that this. 

In the near-term, we anticipate some potential corporate bond supply risk and wobbles in market.  Broadly, markets appear to be pricing in a weak first quarter for China followed by a stimulus-driven rebound. Equities are likely to remain volatile and fresh record highs in the US, for example, suggest global investors may be erring on the side of optimism. Elsewhere, commodities like oil, copper and even coffee have traded lower in recent weeks. 

We don’t see the renminbi at significant risk of depreciation against the dollar at present, as an aggressive move in the current environment would be detrimental to the longer-term prospects for China’s recovery. Around the region, economies impacted by tourism, like Hong Kong, Singapore, or Thailand, should see policy support or rate cuts - and likewise for countries intertwined with China’s industrial sector and supply chain, like South Korea. 

Amid all of this, there are bound to be miscalculations, and surprises, for investors. 

There is a chance that forthcoming stimulus measures from Beijing could fall short of what’s already been priced into the market. On the other hand, there are also risks if China opts for a bolder policy response that exceeds expectations. This would inevitably lead to a short-term sugar high for markets, but one that is followed by misallocations of capital that may not become evident until much later, with negative long-term implications for China’s ability to manage its debt burden. In this environment, we’re happy to remain selectively overweight on credit risk.  

This document is for Investment Professionals only and should not be relied on by private investors.

This document is provided for information purposes only and is intended only for the person or entity to which it is sent. It must not be reproduced or circulated to any other party without prior permission of Fidelity.

This document does not constitute a distribution, an offer or solicitation to engage the investment management services of Fidelity, or an offer to buy or sell or the solicitation of any offer to buy or sell any securities in any jurisdiction or country where such distribution or offer is not authorised or would be contrary to local laws or regulations. Fidelity makes no representations that the contents are appropriate for use in all locations or that the transactions or services discussed are available or appropriate for sale or use in all jurisdictions or countries or by all investors or counterparties.

This communication is not directed at, and must not be acted on by persons inside the United States and is otherwise only directed at persons residing in jurisdictions where the relevant funds are authorised for distribution or where no such authorisation is required. Fidelity is not authorised to manage or distribute investment funds or products in, or to provide investment management or advisory services to persons resident in, mainland China. All persons and entities accessing the information do so on their own initiative and are responsible for compliance with applicable local laws and regulations and should consult their professional advisers.

Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. The research and analysis used in this documentation is gathered by Fidelity for its use as an investment manager and may have already been acted upon for its own purposes. This material was created by Fidelity International.

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Issued in Europe: Issued by FIL Investments International (FCA registered number 122170) a firm authorised and regulated by the Financial Conduct Authority, FIL (Luxembourg) S.A., authorised and supervised by the CSSF (Commission de Surveillance du Secteur Financier) and FIL Investment Switzerland AG. For German wholesale clients issued by FIL Investment Services GmbH, Kastanienhöhe 1, 61476 Kronberg im Taunus. For German Institutional clients issued by FIL (Luxembourg) S.A., 2a, rue Albert Borschette BP 2174 L-1021 Luxembourg.

In Hong Kong, this document is issued by FIL Investment Management (Hong Kong) Limited and it has not been reviewed by the Securities and Future Commission. FIL Investment Management (Singapore) Limited (Co. Reg. No: 199006300E) is the legal representative of Fidelity International in Singapore. FIL Asset Management (Korea) Limited is the legal representative of Fidelity International in Korea. In Taiwan, Independently operated by FIL Securities (Taiwan ) Limited, 11F, 68 Zhongxiao East Road., Section 5, Xinyi Dist., Taipei City, Taiwan 11065, R.O.C Customer Service Number: 0800-00-9911#2 .

Issued in Australia by Fidelity Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”). This material has not been prepared specifically for Australian investors and may contain information which is not prepared in accordance with Australian law.

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