2023 was supposed to be the year of rebirth for the Chinese economy. After the protracted season of COVID lockdowns since 2020 and various crackdowns on the private sector, the sudden policy shift from the central government generated a lot of positive sentiment from investors.

However, hopes for a substantial rebound in economic activity have had to face the reality of much more subdued data in practice. The last quarters have seen more or less disappointing data, with an initial service-driven recovery that gradually lost its natural momentum. We would attribute this mostly to three reasons:

  1. Weakened local government fiscal position, especially in less developed areas of the country. This means less firepower from the fiscal side (e.g. infrastructure spending).
  2. US-China tensions. The nearshoring of manufacturing industries and the recessionary trend in developed markets brought less exports from China. Interestingly enough, for the first time in almost 20 years, the last year has seen a larger share of US imports coming from Mexico than from China.
  3. ‘Zero-Covid’ together with a regulatory crackdown on real estate,
    internet and education companies have structurally lowered people’s expectations for future income growth from the private sectors. This combination of factors contributed to weak demand.
The need for coordinated stimulus was pressing
In such an environment the market started to see the need for coordinated stimulus as more pressing. During the July Politburo, Chinese authorities partially changed their tone and appeared more supportive. In this sense, it was already clear in July that some kind of broader support measures could be expected.

The month of August, in particular, started with renewed pessimism from market participants, driven by weaker than expected macro readings and headlines/data from the real estate sector. This probably gave one more reason to kickstart the season of stimulus with broad-based measures. In a few days we saw a nationwide decrease in minimum downpayment ratios for mortgages, decreases in mortgage rates and deposit rates, income tax deductions and reductions in reserve requirement ratios for onshore FX deposits to support the renminbi.
Enough action to solve structural imbalances?
New measures are clearly welcome and represent already some kind of lifeline for the property sector and the more cyclical segments of the economy strictly connected to construction. Nevertheless, it is quite hard to assume an overly optimistic stance at this point. After a number of months of timid recovery in the first part of the year, house prices as tracked by the 70 cities average started once again to fall on a sequential basis during the summer. YTD sales remain extremely depressed and overall we do not see a strong recovery in household sentiment and hence demand that would allow for a recovery in prices and volume of transactions.

Stimulus measures and broad public support might still help property developers with maturities in the onshore and offshore markets to kick the can down the road for a number of quarters, but this might not be enough to solve structural imbalances that we still see in the Chinese economy when it comes to importance of the construction sector and demographics trends. Potential hidden exposure coming from the wealth management space or other areas of shadow banking is also a key risk when it comes to assess long-term economic consequences.
Comfortable with low China exposure
As investors in emerging markets corporate and sovereign debt, however, this does not mean that we view the country is uninvestable. Large consumer/internet companies still look to us as high quality from a debt standpoint. In the real estate space, for the moment we prefer to avoid direct exposure to private developers, but more recently we have been able to source some interesting opportunities across government-owned vehicles with strong public backing. Bonds in the private sector remain highly volatile and subject to fairly erratic trading patterns that for the moment still demand a conservative stance.

Overall we are comfortable in keeping a lower exposure to China versus standard emerging markets debt indices, but at the same time we recognize that the Chinese corporate bond market is a large and diversified universe. Many companies have a resilient business model and a strong balance sheet that should support debt repayment.

The value of active minds: independent thinking


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