Is China’s slowdown cause for concern?

Chinese financial markets have been under pressure in recent weeks, after economic data missed consensus expectations and the country’s property sector woes deepened. In China’s bond market, some of the smaller provincial borrowers linked to local governments — known as local government financing vehicles, or LGFVs — are also showing signs of stress.

As the world’s second-largest economy continues to slow and retreat into deflation, the impact is rippling across the globe. Asian countries in particular are hit hard by the drop in Chinese demand for their exports. 

Investors are hoping the government will take more action to address the ongoing economic and property sector troubles, before the problems spill over to more sectors.

Here’s a list of commentaries by fund managers on the outlook for China and what its slowdown might mean for the rest of the world.

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Local government financing vehicles: a growing risk for China’s economy?

PIMCO, 1 Sep 2023

“We do not believe local government financing vehicles (LGFVs) pose a systemic risk to the banking system. However, idiosyncratic credit events could occur over the next 6 to 12 months — and, in the long run, banks will likely have to bear some of the cost of debt resolution.”

“If any LGFVs were to default, it would likely create volatility in China’s financial markets, widen credit spreads, cause rates to decline due to a flight-to-quality from corporate to government bonds, and even weaken the yuan. However, we believe that the impact would likely be short term.”

“(LGFV debt’s) size relative to China’s GDP (gross domestic product) has increased over the past decade, but over the past three years has held steady at about 45%.”

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China cuts stamp duty on stock trades and rolls out property measures to boost sentiment

Invesco, 28 Aug 2023

“While there hasn’t been a ‘bazooka’ stimulus announced and it’s still too early to tell whether these measures may prove to be sufficient to turn around the capital markets, we believe that it’s important to recognise that policymakers have significantly stepped up their efforts and more substantive stimulus measures are likely to be rolled out soon.”

“The biggest threat to the Chinese economy right now lies in the floundering property market. While the mortgage easing measure is welcomed, the overall impact could be limited. … We continue to watch out for future fiscal stimulus measures, specifically, efforts to support the real economy particularly on the infrastructure investment and household consumption side.”

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Cautious optimism for China investors

Fidelity International, 24 Aug 2023

“Mainland China's stock market has sold off sharply over the past month, with the CSI 300 index falling 7.7 per cent from the peak of the rally after the politburo meeting on 25 July. The Hang Seng Index in Hong Kong entered a bear market, down 22 per cent from this year’s peak in January (Source: Fidelity International, 21 Aug 2023). And the renminbi has weakened against the dollar, nearing levels seen during the height of Covid-19 lockdowns. Despite this turbulence, it's important for investors not to lose sight of the broader context and potential for long-term investment opportunities.”

“Investors recalibrating expectations for GDP growth and policy support, following a spate of weak economic data and renewed stress in the financial and property sectors, has contributed to the recent market weakness. But beneath this challenging backdrop, there are reasons for cautious optimism for active investors.”

“Chinese stocks now offer appealing value compared to history and other markets in Asia. The 1-year forward price-to-earnings (PE) ratio for MSCI China is 10 times versus it’s 10-year average of 11.4 times for example. That is close to the largest discount to the rest of Asia for the past 20 years. Moreover, the corporate earnings cycle has bottomed out across most sectors and double-digit earnings growth is forecast for MSCI China in 2023 and 2024 based on consensus median estimates.”

12-month forward price-to-earnings (PE) ratio

“But, as always, caution is warranted. While aggregate metrics reveal market valuation and earnings trends, they overlook the vast array of dynamics within the Chinese stock market. This diversity underlines the potential for active bottom-up investment strategies to add value.”

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Opinions

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