Eastspring Investments
Aug 2023 | 5 min read
Summary
There is a rising urgency for Chinese policymakers to act more decisively to stabilise consumer and investor confidence given the recent onslaught of bad news. We believe that more property stimulus will take place in this current quarter which should help support the economy in the fourth quarter of the year.
China’s weak economic momentum continued into July. Investment, production, and consumption edged lower, while the property sector remained in a down cycle. Investment and production may have been negatively impacted by the deadly floods in Northern China although the actual impact is difficult to estimate. Meanwhile the latest inflation readings showed that China has slipped into deflation. In recent days, missed payments by property developer Country Garden and financial conglomerate Zhongzhi have added to investor concerns.
Jingjing Weng, Research Lead at Eastspring Shanghai believes that more defaults by trust companies cannot be ruled out as long as the property downturn persists. Weaker investor risk appetite may also hurt liquidity for these companies. That said, the trust sector’s exposure to the property sector had already slipped to ~5% since the issuance of new asset management regulations in 2018. Those regulations then were a concerted attempt by China’s regulators to curtail the shadow banking sector and reduce financial risks. On a positive note, the recent developments within the trust sector may prompt greater policy support as preventing systemic risk is one of the highest priorities for China’s policymakers.
Following the government’s earlier reluctance to stimulate the economy more aggressively, there appears to be signs of a shift in policy tone. Post the Politburo meeting in July, a statement by policymakers that they would look to adjust and optimise real estate policy had buoyed the real estate sector. Since then, the Chinese central bank has cut the Medium-term Lending Facility rate by 15 bps and the 7-day Open Market Operations rate by 10 bps in August. At the point of writing, there is news that a few Tier-2 cities are planning to lower mortgage down payment requirements. There is rising urgency for policymakers to act more decisively to stabilise consumer and investor confidence given the recent onslaught of bad news and high youth unemployment rate.
According to Clement Chong, who oversees credit research in Eastspring’s Asian Fixed Income team, stabilising the property sector is key to maintaining investor sentiment and home buyer confidence. Should homebuyer confidence fall further, the corresponding declines in sales revenue and operating cash flows, and higher risk aversion among banks could worsen the liquidity conditions for the property sector. The non-performing loan ratio for the banking sector’s property-related loans is expected to rise in 2023 and 2024, but Clement believes that China’s large national banks have the financial strength to withstand a property sector downturn and they remain systematically important to receive ongoing government support, if required.
Jingjing sees July‘s economic data weighing on China’s third quarter GDP. She expects more property stimulus to take place during the quarter which should help support the economy in the fourth quarter of the year. As such, China should still be able to meet its full year GDP growth target of 5% in 2023. As inventories get depleted and the downward trajectory for inflation bottoms out, Jingjing is of the view that a restocking cycle within the manufacturing sector will help drive earnings in the second half of the year. The decline in China’s producer prices had narrowed in July and the base effect appears favourable in the coming months. Meanwhile, China’s core consumer price reading was relatively strong in July. Jingjing believes that readings could turn positive for China’s Consumer Price Index in August and for producer prices early next year.
The China A share market is currently trading around its lows for the year. Given investors’ bearishness, the market is likely to be highly sensitive to any positive newsflow. Going forward, the Chinese government’s desire to rebalance the Chinese economy as well as elevated geopolitical tensions from China’s growing economic influence will continue to drive macro and market volatility. Investors will need to be nimbler in the short term while staying focused on strategic industries that help the Chinese government achieve its desired “security” in supply chains, energy, technology and information in the long term. Eastspring’s China A-share equity team continues to be positive on the high-end manufacturing industry as well as new economy industries such as new energy, consumer, medical services, technology and cyber security.
Interesting reads
Sources:
1At the point of writing – 20 March 2023
2Bloomberg. As of 17 March 2023. In USD terms.
3Bloomberg. As of 17 March 2023. In USD terms.
Singapore by Eastspring Investments (Singapore) Limited (UEN: 199407631H)
Australia (for wholesale clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore, is exempt from the requirement to hold an Australian financial services licence and is licensed and regulated by the Monetary Authority of Singapore under Singapore laws which differ from Australian laws
Hong Kong by Eastspring Investments (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong.
Indonesia by PT Eastspring Investments Indonesia, an investment manager that is licensed, registered and supervised by the Indonesia Financial Services Authority (OJK).
Malaysia by Eastspring Investments Berhad (200001028634/ 531241-U) and Eastspring Al-Wara’ Investments Berhad (200901017585 / 860682-K).
Thailand by Eastspring Asset Management (Thailand) Co., Ltd.
United States of America (for institutional clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore and is registered with the U.S Securities and Exchange Commission as a registered investment adviser.
European Economic Area (for professional clients only) and Switzerland (for qualified investors only) by Eastspring Investments (Luxembourg) S.A., 26, Boulevard Royal, 2449 Luxembourg, Grand-Duchy of Luxembourg, registered with the Registre de Commerce et des Sociétés (Luxembourg), Register No B 173737.
Chile (for institutional clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore and is licensed and regulated by the Monetary Authority of Singapore under Singapore laws which differ from Chilean laws.
The afore-mentioned entities are hereinafter collectively referred to as Eastspring Investments.
The views and opinions contained herein are those of the author, and may not necessarily represent views expressed or reflected in other Eastspring Investments’ communications. This document is solely for information purposes and does not have any regard to the specific investment objective, financial situation and/or particular needs of any specific persons who may receive this document. This document is not intended as an offer, a solicitation of offer or a recommendation, to deal in shares of securities or any financial instruments. It may not be published, circulated, reproduced or distributed without the prior written consent of Eastspring Investments. Reliance upon information in this document is at the sole discretion of the reader. Please carefully study the related information and/or consult your own professional adviser before investing.
Investment involves risks. Past performance of and the predictions, projections, or forecasts on the economy, securities markets or the economic trends of the markets are not necessarily indicative of the future or likely performance of Eastspring Investments or any of the funds managed by Eastspring Investments.
Information herein is believed to be reliable at time of publication. Data from third party sources may have been used in the preparation of this material and Eastspring Investments has not independently verified, validated or audited such data. Where lawfully permitted, Eastspring Investments does not warrant its completeness or accuracy and is not responsible for error of facts or opinion nor shall be liable for damages arising out of any person’s reliance upon this information. Any opinion or estimate contained in this document may subject to change without notice.
Eastspring Investments companies (excluding joint venture companies) are ultimately wholly owned/indirect subsidiaries of Prudential plc of the United Kingdom. Eastspring Investments companies (including joint venture companies) and Prudential plc are not affiliated in any manner with Prudential Financial, Inc., a company whose principal place of business is in the United States of America or with the Prudential Assurance Company Limited, a subsidiary of M&G plc (a company incorporated in the United Kingdom).