China policy: here comes the stimulus, but will it be enough?
Our Emerging Market debt team discuss China, as hopes for a substantial rebound in its economic activity have faced a hard reality. What does this mean for EMD 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:
- 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).
- 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.
- ‘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 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.
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.
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.
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