Growth-friendly policy pivot starting to bear fruit
Record number of travellers moved through China’s airports, hotels and train stations during the national day holidays in the first week of October 2023. China domestic passenger volume was at 71.4 million for railways and 8.3 million for airlines during the first four days of the eight-day Golden Week, up 25.7% and 11.4% respectively compared to 2019 levels. In contrast to this picture of China’s economy, the property sector’s slow motion deleveraging, after a decade and a half of excess, is weighing on sentiment. The picture is mixed, but we believe investors should look at the incremental improvement and consider seizing investment opportunities as the broader economy stabilizes.
The good news is retail sales are steady while China's manufacturing sector rebounded in September with a PMI of 50.2, entering the expansion zone for the first time since April, while the nonmanufacturing PMI also rose to 51.7, also indicating growth. The September PMI data showed both input and output prices increasing, indicating the easing measures may already be working. This is a welcome sign that the incremental policy changes are taking effect and the 2023 growth target of ‘around 5%’ is not out of reach.
Policy roll-out accelerates
China’s broad mix of sector specific and targeted policy changes to support growth is accelerating with moves since August summarized below. We believe the Chinese authorities are also feeling pressure to maintain employment levels, and address youth unemployment. Every one percentage point reduction in GDP growth, translates to a significant loss of jobs, potentially impacting wages, income, and consumer sentiment.
Property
Shanghai, Beijing, Shenzhen and Guangzhou have eased criteria for mortgage identification, making it easier for potential homebuyers to access better mortgage terms. Nationwide mortgage easing has been implemented for both first and second homes, including reductions in down payment ratios and mortgage rates. Tax incentives have also been introduced, such as rising personal income tax allowances for children's education and caregiving, easing financial pressure on potential property buyers. Guangzhou, a Tier 1 city, lifted purchase restrictions in two non-core districts in September.
Local government debt
Another structural issue is indebted local governments that are preventing the transmission of expansionary fiscal policy. In September, Inner Mongolia issued refinancing bonds to repay debts owed to corporations. This could be a model for other provinces and may be discussed further as a potential holistic solution in the fourth quarter.
Capital markets
Measures to stimulate capital markets include halving the stamp duty on stock trading, reducing margin ratios for margin trading, while slowing down the pace of IPOs.
Private sector
The private sector is experiencing a reprieve from regulatory pressure, with signs of relaxation in industries like internet technology. ‘Three big mountains’ affecting average Chinese citizens – the property sector, education, and healthcare – are no longer subject to the regulatory scrutiny of previous years. Logistics group Cainiao’s upcoming IPO, the largest this year globally, is also a sign of encouragement for private enterprise.
Monetary policy
Monetary policy bias is likely to be dovish going forward, in contrast to the US and Europe which face hawkish central banks, and rapidly tightening credit conditions. The People's Bank of China (PBoC) lowered policy rates in August, cutting the one-year MLF rate by 15 bps to 2.5%, earlier than anticipated. It also followed up with a 10 bps one year LPR cut and a 25 bps RRR cut.
China’s tech breakthrough and signs of thawing in the US-China relationship
The biggest drag on China equity market sentiment, beyond the property market, has been the steadily worsening of relations between the US and China, with investors fearing that China’s technological progress would be hamstrung by trade sanctions, but so far that doesn’t seem to be happening. Huawei's breakthrough in semiconductors showed China’s commitment to becoming self-sufficient in this critical technology despite restrictions from the US. The country's growing market share in the electric vehicle (EV) industry, surpassing Japan as the largest auto exporter, could also see investors reassess China’s prospects. In addition, the formal relationship between the US and China has shown some improvement, with the establishment of working groups on economic and financial issues, aimed at facilitating policy communications.
Equity market quiescent but potential catalysts ahead
Key potential market catalysts to watch out for include property market data reflecting homebuyer confidence, the Third Plenary session of the Chinese Communist Party (likely to be scheduled in November) discussing economic policies and reforms, and the Xi-Biden APEC summit to take place in San Francisco in November. More fiscal and housing policy relaxation is likely in our view, while monetary policy actions will be data dependent as the economy builds the foundations of a more sustained recovery.
Market sentiment has been very depressed, however continuous data improvements could lead to a rebound in China's equities market, particularly in the favorable seasonality of the fourth quarter. In our China strategies, we continue to favor themes including the green economy, technology innovation, and the technological upgrade of China’s industrial base. The earnings trend has remained subdued, but an earnings revival would be a major catalyst for Chinese equity markets, and long-term investors should be in position ahead of that.