Is China's slowdown cause for concern?
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Is China's slowdown cause for concern?

Sep 2023
Sep 2023
Is China's economic slowdown cause for concern for investors?
  • China’s growth has stumbled. A growing property crisis is expected to take a further toll on the economy. 
  • But is the risk from China’s slowdown overstated? Read on for fund managers’ views on what may lie ahead for the world’s second-largest economy.
  • To explore best-in-class funds from leading global fund managers, check out the Endowus Fund Smart platform.

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.


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.”


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.”


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.”

Diagram: The deflation cycle - low growth, falling prices, low production, low salaries, low demand. Source: UOBAM
Source: UOBAM

“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.”


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.”

Chart: LGFV credit spreads differ widely across China. Source: ChinaBond, Fidelity International

“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.”


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%.”

Chart: Breakdown of Chinese government bonds and LGFV debt as a percentage of GDP


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