Eastspring Investments
Aug 2023 | 5 min
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 home buyer 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.
The information and views expressed herein do not constitute an offer or solicitation to deal in shares of any securities or financial instruments and it is not intended for distribution or use by anyone or entity located in any jurisdiction where such distribution would be unlawful or prohibited. The information does not constitute investment advice or an offer to provide investment advisory or investment management service or the solicitation of an offer to provide investment advisory or investment management services in any jurisdiction in which an offer or solicitation would be unlawful under the securities laws of that jurisdiction.
Past performance 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 strategies managed by Eastspring Investments. An investment is subject to investment risks, including the possible loss of the principal amount invested. Where an investment is denominated in another currency, exchange rates may have an adverse effect on the value price or income of that investment. Furthermore, exposure to a single country market, specific portfolio composition or management techniques may potentially increase volatility.
Any securities mentioned are included for illustration purposes only. It should not be considered a recommendation to purchase or sell such securities. There is no assurance that any security discussed herein will remain in the portfolio at the time you receive this document or that security sold has not been repurchased.
The information provided herein is believed to be reliable at time of publication and based on matters as they exist as of the date of preparation of this report and not as of any future date. Eastspring Investments undertakes no (and disclaims any) obligation to update, modify or amend this document or to otherwise notify you in the event that any matter stated in the materials, or any opinion, projection, forecast or estimate set forth in the document, changes or subsequently becomes inaccurate. Eastspring Investments personnel may develop views and opinions that are not stated in the materials or that are contrary to the views and opinions stated in the materials at any time and from time to time as the result of a negative factor that comes to its attention in respect to an investment or for any other reason or for no reason. Eastspring Investments shall not and shall have no duty to notify you of any such views and opinions. This document is solely for information and does not have any regard to the specific investment objectives, financial or tax situation and the particular needs of any specific person who may receive this document.
Eastspring Investments Inc. (Eastspring US) primary activity is to provide certain marketing, sales servicing, and client support in the US on behalf of Eastspring Investment (Singapore) Limited (“Eastspring Singapore”). Eastspring Singapore is an affiliated investment management entity that is domiciled and registered under, among other regulatory bodies, the Monetary Authority of Singapore (MAS). Eastspring Singapore and Eastspring US are both registered with the US Securities and Exchange Commission as a registered investment adviser. Registration as an adviser does not imply a level of skill or training. Eastspring US seeks to identify and introduce to Eastspring Singapore potential institutional client prospects. Such prospects, once introduced, would contract directly with Eastspring Singapore for any investment management or advisory services. Additional information about Eastspring Singapore and Eastspring US is also is available on the SEC’s website at www.adviserinfo.sec. gov.
Certain information contained herein constitutes "forward-looking statements", which can be identified by the use of forward-looking terminology such as "may", "will", "should", "expect", "anticipate", "project", "estimate", "intend", "continue" or "believe" or the negatives thereof, other variations thereof or comparable terminology. Such information is based on expectations, estimates and projections (and assumptions underlying such information) and cannot be relied upon as a guarantee of future performance. Due to various risks and uncertainties, actual events or results, or the actual performance of any fund may differ materially from those reflected or contemplated in such forward-looking statements.
Eastspring Investments companies (excluding JV companies) are ultimately wholly-owned / indirect subsidiaries / associate of Prudential plc of the United Kingdom. Eastspring Investments companies (including JV’s) 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.