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 retreats 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.

<divider><divider>

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.”

<divider><divider>

Is this China’s “Lehman Brothers moment”?

Schroders, 25 Aug 2023

“The financial system in China is awash with cash, actually. Interbank rates are very low because of excess liquidity stuck in the financial system. But it's not getting out into the broader real economy, in large part because housing isn't an avenue for that to happen. So (in the) short term, that's created a bit of a plumbing problem in terms of policy support getting out. And in the longer term, there will clearly be a negative impact on the economy's potential rate of growth.”

“The actual spillovers to the world in aggregate (are) quite limited, in terms of weaker Chinese demand. … The risk from China growing not as quickly is often overstated. Actually, the greater risk probably comes through confidence shocks and worries that China's about to implode and people just sort of retreating a bit from risky assets.”

“Could this be China's ‘Lehman Brothers moment’? … There are some parallels, clearly, given that we seem to be having financial problems emanating from the housing market… That said, it's worth stepping back, remembering that these issues in the housing market are really actually well-known … so it doesn't necessarily have that element of surprise that the Lehman Brothers situation did as we went into the Global Financial Crisis.”

<divider><divider>

No relief for China investors

UOB Asset Management, 22 Aug 2023

“China’s rate cuts this week were more limited than investors had hoped. Meanwhile, the country’s property crisis continues to deepen. Markets (are) set to remain volatile until (the) economy shows signs of stabilising.”

“The deepening property crisis has spilled over into the financial sector… Meanwhile, the country is now facing deflation (i.e. falling prices), thereby risking a Japan-like scenario of downward-spiralling growth.”

“Short-term caution, long-term optimism: UOB Asset Management is underweight on China in the near term and have been highly cautious in terms of our exposure to the property sector since 2021.”

“Nevertheless we note that specific segments within the China market continue to grow despite current economic wobbles, and the country’s longer-term prospects remain intact.”

<divider><divider>

Watching for cracks amid pressure on China’s local government finances

Fidelity International, 24 Aug 2023

“Several of China’s local government financing vehicles (LGFVs) have made recent headlines for their struggles to service debts, rattling the country’s financial markets. But not all LGFVs are created equal. And while the slowing economy could send some of the weakest issuers to the wall, the fallout so far is contained and doesn’t suggest signs of a systemic crisis.”

“Consider the recent movement in credit spreads of bonds issued by LGFVs across different Chinese regions. The chart shows clearly how credit differentiation is rising in China, especially in those provinces with the smallest economies, slowest growth rates or heaviest debt loads relative to their ability to repay. In such regions, the spreads — or yield premium over government bonds of a comparable maturity — have surged for weaker-rated credits. But beyond these regions, the spreads on LGFV bonds have barely moved, suggesting investors see the collateral damage as being effectively contained.”

“At the same time, we see other risks continuing to weigh on the market. Weakening land sales amid China’s property downturn have been a key contributor to LGFV stress.”

<divider><divider>

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%.”

<divider><divider>

Building a resilient long-term investment portfolio through Endowus

It is impossible to predict how macroeconomic events would play out, or to prepare for any consequent implications on your investments.

However, spreading your investments across asset classes and geographies will help with diversifying your risk. With market volatility comes opportunities. If you have a long-term investing horizon, as many of us do, these developments may offer an opportunity through steady, regular investing in diversified and risk-adjusted portfolios.

With digital wealth platform Endowus, you can plan and manage your money — by investing in best-in-class funds and globally diversified, intelligent, low-cost funds and portfolios seamlessly.

Click here to get started with your investing journey with Endowus today. To explore best-in-class funds from leading global fund managers, check out the Endowus Fund Smart platform.

<divider><divider>

Investment involves risk. Past performance is not necessarily a guide to future performance or returns. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. Rates of exchange may cause the value of investments to go up or down. Individual stock performance does not represent the return of a fund.

Any forward-looking statements, prediction, projection or forecast on the economy, stock market, bond market or economic trends of the markets contained in this material are subject to market influences and contingent upon matters outside the control of Endowus Singapore Pte. Ltd. (“Endowus”) and therefore may not be realised in the future. Further, any opinion or estimate is made on a general basis and subject to change without notice. In presenting the information above, none of Endowus, its affiliates, directors, employees, representatives or agents have given any consideration to, nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Therefore, no representation is made as to the completeness and adequacy of the information to make an informed decision. You should carefully consider (i) whether any investment views and products/ services are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You may also wish to seek financial advice through a financial advisor or the Endowus platform and independent legal, accounting, regulatory or tax advice, as appropriate.

Investment into collective investment schemes: Please refer to respective funds’ prospectuses for details of the funds, their related fees, charges and risk factors. The listing of units of the fund on a stock exchange does not guarantee a liquid market for the units. Before making an investment decision, you are reminded to refer to the relevant prospectus for specific risk considerations.

For Cash Smart Secure, Cash Smart Enhanced, Cash Smart Ultra: It is not a bank deposit and not capital guaranteed, and is subject to investment risks, including the possible loss of the principal amount invested. Investment products are not insured products under the provisions of the Deposit Insurance and Policy Owners Protection Schemes Act 2011 of Singapore and are not eligible for deposit insurance coverage under the Deposit Insurance Scheme. Interest rates are indicative and subject to change at any time.

Product Risk Rating: Please note that any product risk rating (the “PRR”) provided by us is an internal rating assigned based on our product risk assessment model, and is for your reference only. The PRR is subject to change from time to time. The PRR does not take into account your individual circumstances, objectives or needs and should not be regarded as advice or recommendation to purchase, hold or sell any fund or make any other investment decisions. Accordingly, you should not solely rely on the PRR in making your investment decision in the relevant Fund.

This advertisement has not been reviewed by the Monetary Authority of Singapore.