Market views: How will China counter its slowing growth?
With China's second-quarter GDP growth rate slowing to 6.2%, concerns have been raised over whether the expansion plan for the world’s second largest economy could be derailed.
While the numbers were in line with analyst expectations, China is faced with challenges that could persist over the long term. It is under increasing pressure because of its trade dispute with the US: official trade data indicated that the country’s exports fell by 1.3% in June to $212.8 billion.
On the bright side, retail sales of consumer goods rose 8.4% on a year-on-year basis in the first half of 2019, reaching Rmb19.5 trillion ($2.8 trillion). This suggests China’s efforts to grow the economy by encouraging consumer spending are succeeding.
But questions remain. Does China need more stimulus to give its economy a further leg up, in addition to the tax cuts that have already taken place?
And what impact will the further opening up of the economy have on investments into the country? Which asset classes will see a positive impact, and which will lag behind?
AsianInvestor raised these issues with several investment and economic experts.
The following extracts have been edited for brevity and clarity.
Charles Sunnucks, fund manager for emerging markets
Jupiter Asset Management
Policy makers will be highly hesitant regarding further stimulus. Whilst second-quarter GDP figures may be the lowest on record, the data also points towards some positive momentum into June.
Moreover, tax cuts equivalent to a significant 2.5% of China’s GDP – which commenced in April – will only start to make an impact in the coming quarters. While there could be targeted stimulus in particularly weak areas of the economy such as the auto sector, policy makers will be most concentrated on delivering reform. Ultimately, this is the only way to deliver sustainable economic growth.
Key areas of reform will likely include that of the banking sector – already significant changes have been made, but more needs to be done – and broader reform of state-owned organisations, which has so far progressed slowly but is required to help fund the tax cuts.
Meanwhile, China's opening up will have a material impact on investments into the mainland, but not to the same extent as in the past, as the outcome of trade negotiations will also weigh heavily on investor confidence.
As for specific asset classes, we find the most attractive bottom-up opportunities in offshore listed equity (namely listed in Hong Kong or the US). There are a pool of investment opportunities that remain compelling in this area, combining both valuation support in the instance of protracted weakness with material upside to growth prospects in the event of a stabilisation in the economic backdrop.
However, investors need to remain highly selective. First-half earnings are likely to expose weakness in some of the more cyclical pockets of the market, for instance in the media and auto spaces.
Christiaan Tuntono, Asia-Pacific senior economist
Allianz Global Investors
We think China's better-than-expected June growth performance may have been driven by stronger public infrastructure investment projects and resilient consumer demand, hinting that the government’s economic stimulus measures introduced so far could have been taking effect.
We expect to see more fiscal and monetary stimulus measures to provide greater support for growth over the second half of 2019, possibly to be launched after the upcoming Politburo economic meeting in late July.
On the fiscal side, we think the government is likely to approve more infrastructure investment projects, funded by the pick-up in special local government bond issuance in Q1 2019 and in June.
Stronger consumption-stimulus measures are also likely. On the monetary side, we expect to see at least a 100-basis-point cut in the required reserve ratio to inject more liquidity into the banking system to guide down the interbank interest rates. We could also see a faster pace of interest rate reform to replace the benchmark lending rate with the loan prime rate to lower the interest cost for the corporate sector.
We think that the opening-up of China’s asset market will help promote the internationalisation of the renminbi and attract capital inflows [from institutional investors] into the economy. This will help stabilise the value of the RMB over the long term, which would be positive for China’s macro stability and provide support for domestic risk asset prices.
Oliver Lee, investment director
Merian Global Investors
Although the Q2 2019 Chinese GDP growth number of 6.2% was softer than the 6.4% in Q1, it was in line with consensus expectations, and the June data showed signs of increased activity in the economy. This probably reduces the chance of any major new stimulus measures being announced at the forthcoming Politburo meeting.
That said, with a backdrop of slowing global growth and trade war negotiations continuing to have an impact on Chinese exports, we believe the government will need to introduce new measures before the year-end to keep domestic growth above the psychologically important 6% level. These will be things like looser regulations to bolster infrastructure spending or lower benchmark rates to support the property sector, both of which would be viewed as positive for the equity market (as would any substantial pick-up in overall credit growth or signs of progress in the Sino-US trade talks).
China is continuing down the path of opening up both its domestic bond and equity markets to international investors, and ultimately integrating further into the world’s capital markets. Long term, this is a significant and positive step. Initiatives like the Stock Connect programmes widen the potential buyer pool for Chinese A-shares, leading to significant incremental demand. And the recent announcement by MSCI to increase the inclusion factor for A-shares in their indices means additional foreign capital inflows.
Marcella Chow, global market strategist
JP Morgan Asset Management
The key challenge for China’s economic growth remains the drag from the trade sector due to lingering uncertainty thanks to US-China trade tensions. Of course, incremental improvement – similar to the current agreement on ceasefire – could offer some temporary reassurance, but this is unlikely to be sustainable.
With regard to policy responses, instead of providing stimulus measures to boost growth, we believe China’s policymakers’ latest take will be to provide growth stabilisation rather than growth upside, especially as the room for policy easing has become more constrained after several rounds of easing post-financial crisis. Policy easing will probably continue in the coming months, especially in infrastructure investment and targeted liquidity support, but this will likely be data-dependent.
The accelerated pace of capital market reform and financial market opening in the past few years remain encouraging. We expect further capital market development and opening to drive more foreign capital flows into the onshore financial markets in the coming years.
Moreover, as the A-share inclusion into MSCI and FTSE indices further expands, this should continue to enhance the investor structure of the onshore equity markets by triggering more foreign investment flows. Foreign ownership of A-shares has increased steadily, and represented around 3% of total domestic market cap in March.
Thomas Poullaouec, head of multi-asset solutions for Asia Pacific
T. Rowe Price
Long-term economic success shouldn’t be measured in terms of GDP. It is inevitable that China’s GDP growth slows over the long term as its economic model transforms from manufacturing to services accompanied with an increase in income per capita. This is already happening and explains part of the slowdown in the GDP number from 2009 to today.
Short-term stimulus is helpful to pilot this transformation and ensure a controlled slowdown. In the short term, the June activity data indicated some green shoots despite the weak GDP figure for Q2, so the stimulus measures implemented over the past six to nine months might be starting to bear fruit.
As for the question of foreign strategic investment into China, firstly investors are under-invested in Chinese assets compared to China’s share of the global economy due to the current capital controls, so there is a solid rationale to invest despite the GDP slowdown. Secondly, investors will focus on assets where there is the greatest degree of transparency around the investment itself and around the regulation surrounding it.
Aidan Yao, senior emerging Asia economist
Axa Investment Managers
As Beijing works hard to strike a better balance between the quality and speed of growth, we think future policy operations will comprise a combination of fiscal boosts (for short-term growth) and structural reforms (for long-term economic health). The former boosts may comprise infrastructure investment support, further tax and fee reductions for SMEs, and subsidies for durable consumption, while the latter reforms would include accelerating urbanisation and economic/financial liberalisation.
China’s financial opening-up will fundamentally reshape the global financial landscape, much like its economic integration did for the global economy in the past decades. This is a secular trend that will trigger tens of trillions [of dollars] of cross-border flows in the coming decades.
Structurally, both onshore equities and bonds stand to benefit from increased foreign investor participation – a trend that was already visible from the recent index inclusion of renminbi assets.