China: Steadier growth needed to lift investor confidence

Better visibility and steadier economic growth are needed before investors would embrace the China A market’s attractive valuations. We expect the government to roll out more pro-growth measures and believe that fiscal rather than monetary policies will be more effective in stabilising near term growth.

Amid domestic and external concerns, heightened investor risk aversion has weighed on the China A-share market. The CSI 300 Index is trading at 10x 12-month forward price to earnings ratio, near the bottom of its long-term historical range. Although the market’s valuations look attractive, steadier economic growth is needed for a sustained V-shape rebound.

Thanks for subscribing!

Follow us :

A rapidly slowing economy calls for greater support

The Chinese economy grew 4.8% in the first quarter of 2022, largely in line with the market consensus. However, data in the coming months are likely to provide a more accurate assessment of the sharp slowdown caused by the recent lockdowns across multiple Chinese cities, supply chain disruptions, rising unemployment, and still weak property activities.

As a harbinger of what is to come, the top 100 real estate companies registered total sales of RMB 379.6 bn in March, down 54.5% from the year before. 35.76 million square meters of floor space was sold in March, a year-on-year decrease of 57.1%. As the outbreak of the Omicron variant gathered pace, high-frequency data such as cement and steel production have weakened. Not surprisingly, consumption has been hurt. Retail sales grew 6.7% yoy in January to February but contracted 3.5%yoy in March. With the prices of upstream commodities such as oil and metals remaining high as a result of the Russia-Ukraine war, the risk of stagflation is rising.

The market is likely to focus on whether policymakers will lower 2022’s economic growth target, and how the government intends to balance the need to stabilise near term growth and implement long term structural reforms. Given the rapid slowdown, we expect the government to focus on stabilising near term growth.

Fiscal, not monetary, policies are likely to be more effective

While the People’s Bank of China has cut the reserve requirement ratio (RRR) by 25 bp on 15th April to inject more liquidity into the financial system, the effectiveness of China’s monetary easing remains to be seen. Earlier RRR and interest rate cuts did not lift the real economy, as seen from the still deteriorating economic data. The central bank recently published 23 measures encouraging financial institutions to support local government infrastructure projects and the property sector, as well as provide financial services to industries hit by the pandemic. In our view, supportive fiscal policies in terms of direct financial subsidies to spur consumption and boost consumer/business confidence may be more effective at this stage.

A number of pro-growth measures are already being rolled out. Housing policy has become more supportive at the city level, with more favourable mortgage rates, down payments as well as more relaxed home purchase and/or resale restrictions. Meanwhile the Ministry of Finance is expected to return RMB1.5 trn in tax credit to the corporate sector starting from April and accelerate special bond issuance and deployment. The boost to infrastructure investment (II) also seems to be coming through - infrastructure investment accelerated from 8.1% yoy in January - February to 8.5% yoy in the first quarter of the year. In addition, targeted measures including tax rebates, fee reductions and rent exemptions are being introduced across cities, which could potentially reduce the corporate burden by RMB75 bn in Shenzhen and RMB140 bn in Shanghai1. That said, the existing pro-growth measures are still insufficient to fully offset the downward pressure on the economy. We see growth momentum weakening further and potentially hitting a trough in the second quarter of the year. The biggest risks/uncertainties lie with the ongoing development of the Omicron variant and the associated lockdown measures.

Still optimistic on China’s investment opportunities

We believe that investor risk appetite will return when the epidemic situation improves, and growth stabilises on the back of supportive monetary and fiscal policies.

It is key that economic policies remain relatively stable, sustainable, and predictable. Clear communication of policy objectives as well as efficient implementation will help to shore up investor confidence further. As would a timely response to market concerns.

We remain optimistic about the medium and long-term development of China's economy as it transitions to a new growth model. We believe that stable and sustainable policy support will foster internationally competitive enterprises, providing attractive opportunities for long term investors.

We continue to favour the high-end manufacturing sector given its higher barriers to entry and the government’s strong push for domestic substitution. We also like new economy sectors which includes new energy, consumer and medical services that are likely to benefit from rising domestic consumption.

Sources:
1 Citi Research. Growth pessimism perhaps overdone. 18 April 2022.

This document is produced by Eastspring Investments (Singapore) Limited and issued in:

Singapore and Australia (for wholesale clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore, is exempt from the requirement to hold an Australian financial services licence and is licensed and regulated by the Monetary Authority of Singapore under Singapore laws which differ from Australian laws.

Hong Kong by Eastspring Investments (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong.


Indonesia by PT Eastspring Investments Indonesia, an investment manager that is licensed, registered and supervised by the Indonesia Financial Services Authority (OJK).


Malaysia by Eastspring Investments Berhad (531241-U).


This document is produced by Eastspring Investments (Singapore) Limited and issued in Thailand by TMB Asset Management Co., Ltd. Investment contains certain risks; investors are advised to carefully study the related information before investing. The past performance of any the fund is not indicative of future performance.


United States of America (for institutional clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore and is registered with the U.S Securities and Exchange Commission as a registered investment adviser.


European Economic Area (for professional clients only) and Switzerland (for qualified investors only) by Eastspring Investments (Luxembourg) S.A., 26, Boulevard Royal, 2449 Luxembourg, Grand-Duchy of Luxembourg, registered with the Registre de Commerce et des Sociétés (Luxembourg), Register No B 173737.


United Kingdom (for professional clients only) by Eastspring Investments (Luxembourg) S.A. - UK Branch, 10 Lower Thames Street, London EC3R 6AF.


Chile (for institutional clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore and is licensed and regulated by the Monetary Authority of Singapore under Singapore laws which differ from Chilean laws.


The afore-mentioned entities are hereinafter collectively referred to as Eastspring Investments.


The views and opinions contained herein are those of the author on this page, and may not necessarily represent views expressed or reflected in other Eastspring Investments’ communications. This document is solely for information purposes and does not have any regard to the specific investment objective, financial situation and/or particular needs of any specific persons who may receive this document. This document is not intended as an offer, a solicitation of offer or a recommendation, to deal in shares of securities or any financial instruments. It may not be published, circulated, reproduced or distributed without the prior written consent of Eastspring Investments. Reliance upon information in this posting is at the sole discretion of the reader. Please consult your own professional adviser before investing.


Investment involves risk. 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 funds managed by Eastspring Investments.


Information herein is believed to be reliable at time of publication. Data from third party sources may have been used in the preparation of this material and Eastspring Investments has not independently verified, validated or audited such data. Where lawfully permitted, Eastspring Investments does not warrant its completeness or accuracy and is not responsible for error of facts or opinion nor shall be liable for damages arising out of any person’s reliance upon this information. Any opinion or estimate contained in this document may subject to change without notice.


Eastspring Investments (excluding JV companies) 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 or with the Prudential Assurance Company, a subsidiary of M&G plc (a company incorporated in the United Kingdom).