Strategy

Concerns Over China Overblown – Investment Managers Say

Amanda Cheesley Deputy Editor 11 September 2023

Concerns Over China Overblown – Investment Managers Say

Investment managers at Pictet Wealth Management and Alberto Matellán, chief economist at MAPFRE Inversión, part of MAPFRE insurance group, share their views on the Chinese economy and Chinese equities.

After a short-lived rebound in the property sales earlier this year, the housing downturn in China continues, Dong Chen, head of Asia macroeconomic research and Julien Holtz, emerging market strategist at Pictet Wealth Management, said on Friday.  

“The sharp fall in housing sales and their growing difficulty in accessing credit have pushed many privately-owned developers into deep financial distress. In the first half of 2023, funds available to private developers contracted by 9.8 per cent, following a contraction of 29.5 per cent in 2022,” they said. “The combination of weak sales revenues and the loss of refinancing capabilities has led many property firms to default or negotiate repayment extensions since the start of 2022,” they continued.

Country Garden, which used to be the largest property developer in China, missed two offshore bond repayments in August. Only days after, Zhongrong Trust (ZRT), a shadow-banking institution owned by Zhongzhi Enterprise Group – one of the largest private wealth management companies in China – reportedly missed payments to its investors due to its products’ wide exposure to property developers. “These events raised the fear of systemic financial risks in China,” they added.

Chen and Holtz believe that the ongoing property woes pose a major challenge to Chinese growth. However, they think that the current market concerns of a near-term financial meltdown are likely to be overblown, as China’s formal banking sector, which accounts for the bulk of the financial system, is still fairly sound, despite the property slump.

The Chinese banking sector has limited direct exposure to property developers. The authorities have also taken action to alleviate the acute liquidity stress in parts of the private sector and at some local governments. While they do not expect a financial meltdown, they believe that the property slump will likely cost the Chinese economy in terms of long-term growth potential, primarily because of a sharp slowdown in investment.

“Sentiment towards Chinese equities is undoubtedly depressed. Despite low valuations, which look even more stretched on a sector-adjusted basis, investors are clearly not queuing to pile into Chinese stocks,” they said. “The earnings' picture, too, remains unappealing, as expectations for profit growth this year of almost 20 per cent remain too high, and revisions steadily negative, particularly in US dollar terms,” they continued.

While the overall picture is grim, bearishness over Chinese equities may have reached a local peak, consequently they are refraining from cutting their exposure. But they have adjusted their year-end target for the MSCI China downwards, expecting a slight re-rating of forward earnings and high single-digit earnings' growth.

MAPFRE Inversión
Their views were echoed by Alberto Matellán, chief economist at MAPFRE Inversión. "In the last decade, we’ve seen occasions when China was going in the wrong direction. But it’s more widespread now and this is spooking investors. However, the government has resources available and is showing a willingness to act. The difference this time is that the support measures adopted by both the executive branch and the People's Bank of China are more measured and are being deployed more slowly,” he said. The resources are there to handle it and he doesn’t expect a dramatic impact on the markets.

Matellán said that as professional investors look towards the coming months, no change has been made to the portfolio. He insisted that there are times, such as now, when the best thing to do is not do anything. "What I would recommend to investors is to not get nervous. One of the main problems is boredom. It makes them nervous, but there are times when it's best not to change anything," he said.

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