EditIntroduction
The Lunar Year of the Dragon comes after a twist and turn in the market. The rapid** early days of the post-pandemic economic reopening are a thing of the past, and the outlook for 2024 is not without bright spots, despite the challenges facing the recovery. Stepping into the first month of the new year, ** actively expressed its position, and the introduction of market support measures is in sight. Despite the sluggish sentiment and housing market problems, China's economy has also shown resilience in several areas. That said, there is still a general lack of confidence in the market, and stronger policies may be needed to avoid further deflation. To help you understand the outlook for the Chinese marketThis article will delve into key areas of focus in China's economy and capital markets.
Why did the 2023 performance disappoint?
2023 has been a difficult year for China's economy. With the lifting of lockdown measures, many businesses, especially in the service sector, did see a boom in the early days after the lockdown was lifted. However, the effects of the reopening soon faded, while at the same time, the turmoil in the property market intensified. Country Garden, one of China's largest private developers, fell into debt trouble throughout the summer of last year, which shook business and investor confidence.
The headwinds in the housing market have spilled over into consumer sentiment and led to local fiscal constraints, so policymakers are focused on curbing the contagion of local debt risks and pushing for reforms in the financial system. In the process, some modest easing measures, such as policy rate cuts and fiscal support, were implemented to ease downward pressures on the economy, but these measures did not drive an upturn in economic activity.
Editor: Headwinds for China's economy remain in 2024, but it's still unclear how the situation will evolve next. Although the objectives and details of the policy are becoming clearer, there is still a great deal of uncertainty in terms of implementation and effectiveness. In our view, three key factors will drive the balance between growth and risk in 2024. For each of these three factors, we will explain the optimistic and pessimistic scenarios, as well as our views on them.
The dilemma of the real estate market
The housing market has always been seen as an important indicator of the economy and market confidence。Although the property market has been in decline for three years, the market still seems to be some way from bottoming, and expectations have become more pessimistic. In the first two weeks of the year, home sales were only about half of what they were at the same time last year, making a modest start. Developers are facing financial difficulties, which has left homebuyers with little confidence in whether they will be able to deliver their homes on time. The cumulative difference between sold and completed properties highlights the magnitude of the problem.
This led to a further weakening of sales, increasing the pressure on developers, creating a downward spiral. This can be seen in pre-sale home sales**, while second-hand home sales have remained stable. China** has launched a series of programs to support the real estate sector. By the end of 2023, it is proposed to expand a number of important urbanization projects, including the so-calledUrban village(i.e., clusters of self-built housing left behind in large cities).
Although the details of the project are limited, and the plan is in its early stages of implementation due to the extreme complexity of land ownership and local differences, it is difficult to determine its ultimate impact at this time。In an optimistic scenario, property-related support will continue, with the central bank announcing plans to introduce new policy tools to help with financing, for example. Once fully implemented (assuming a 10-year implementation period), urban renewal projects may contribute up to 10% of annual sales.
This means that the full implementation of the policy may help stabilize home sales in 2024. In a pessimistic scenario, while increasing public sector construction through the expansion of affordable housing and the upgrading of shantytowns may help offset some of the downturn in real estate investment, these plans do not directly address the market's loss of confidence in developers pre-selling commercial housing. From a macro perspective, these measures may have a positive impact, but they do not necessarily address the current micro problem (i.e. the market's concern about whether developers will be able to build their homes on time and whether house prices will continue**). If these programs don't work well, or if homebuyer confidence remains weak, real estate** and sales volumes are likely to continue to contract, impacting resident sentiment and broader industry sentiment.
EditThe situation in the export industry
Given the consensus expectation of slower growth in developed markets, particularly the United States, export growth will face cyclical challenges. The trend of diversification of global ** chains is a structural problem. Under the concern of overcapacity, the above two reasons have led to the export of **** in the second half of 2023.
In an optimistic scenario, exports** are likely to stabilize, indicating that companies have completed adjustments and export prospects are expected to improve. The rapid expansion of emerging industries such as electric vehicles could be a driving force for overseas exports. China still dominates many high-tech chains, so the chains are diversified and"De-risk"and other trends may slow down. In a pessimistic scenario, the rapid growth of EV exports and a significant increase in overall manufacturing capacity supported the economy during the downturn in the housing market, but the surge in exports, coupled with the market's growing concern about overcapacity, is beginning to trigger a global capital boycott, which could lead to tensions, which in turn will put new pressure on China's exports and manufacturing.
Edit our point of view:China's position as a global manufacturing industry is unlikely to be damaged, and cyclical demand for exports is expected to remain solid。Although de-globalization and de-risking are considered potential risks, the data shows that the ** chain only extends to a wider area, and China's position in it remains strong. In addition, most of the investment flows into Indonesia and Vietnam that we have discussed are actually the result of Chinese manufacturers extending their own ** chains.
The automotive industry is a highly politically sensitive area and as such could cause ** friction, but this is unlikely to happen instantaneously and may be limited to affecting only a few countries. Most emerging countries lack automotive manufacturing and are therefore more willing to import** attractive Chinese electric vehicles. Business sentiment is the last factor. Private sector investment has slowed significantly as a result of tighter regulation over the past few years. Although this is partly influenced by cyclical factors, policy is also very important for confidence in the corporate sector.
While the policy signals released by the editors in recent weeks have been mixed, a clearer and more acceptable regulatory environment will be a key factor in stabilizing business investment. In 2023, policymakers have adopted some degree of monetary and fiscal easing. We expect monetary policy easing to continue in 2024If the U.S. also eases monetary policy as the market expects, China may accelerate the pace of easing. Fiscal policy is likely to take on more responsibility, particularly in coordinating with other ** institutions to stabilize the housing market. As the property market becomes less volatile and regulatory clarity becomes clearer, this may be the key to a more persistently optimistic economic outlook.
**Piecemeal stimulus and policy support for the property market is likely to be introduced, which could exacerbate the risk of deflation and continued sluggish market confidence。Policy may prevent a cyclical deterioration in economic growth, but growth is likely to remain weak in the absence of strong stimulus to restore stability to the property sector. While the focus is on real estate and stimulus, the primary focus is on maintaining stability and security, and fostering self-sufficiency, which is a priority over driving growth and economic reforms, which could lead to a sustained depressed outlook.
Editors: Our point is that it is difficult to make a definitive judgment on the current argument. In the short term, policymakers seem willing to restore market confidence. However, it is unclear what the actual effect of the policy will be, as market confidence is difficult to accurately assess. We believe that the risks of an optimistic and pessimistic scenario are equal. Overall, 2024 appears to be a challenging year for China's economy, with different outlooks across sectors. There is a general desire for more substantial stimulus to be revived"Animal spirits", but the scope and effectiveness of these measures are still unknown.
So, what does such an economic outlook mean for investors? For investors, the current economic outlook means that vigilance and flexibility are needed. Despite the potential for market volatility in the short term, China's economy still has strong potential in the long term. Investors should adopt a prudent investment strategy based on their risk tolerance and investment objectives, and pay close attention to policy changes and market dynamics. In such an uncertain environment, it will be especially important to maintain a diversified portfolio and regularly review investment strategies.
Hedge foreign exchange risks and use financing currencies reasonably
On the currency side, we maintain our view of hedging our long CNH positions or using them as a funding currency for a number of reasons. First of all,The current interest rate of the offshore yuan is lower than that of many major currencies, and with the PBOC leading the rest of the world's major economies into an easing cycle, interest rate differentials are likely to widen further。As a result, investors can expect to enjoy lower borrowing costs or hedge against depreciation with positive interest rate differentials.
Edit second,The balance of payments remains under pressure as export growth is likely to slow and outbound passenger flows are likely to pick up, which could have an impact on the value of the renminbi。Last but not least, 2024 is a big year for global elections, and geopolitical risks will persist and could lead to volatility in the FX market. In terms of seasonality, the CNH typically strengthens closer to the Chinese New Year due to the exchange flows of exporters, which may provide a good window for investors to open positions.
**: Policy action is becoming more decisive
As China hits new lows, it has become more proactive in implementing support measuresOn January 24, the People's Bank of China unexpectedly announced a 50 basis point cut in the reserve requirement ratio, which is estimated to release RMB 1 trillion of liquidity to the market. On December 22, the National Press and Publication Administration issued a draft of the management measures for comments, the content of which has the potential to have a negative impact on China's online games, and has been removed from the ** after strong market opposition, which is relatively rare, so it has caused speculation that more relaxed management measures may be issued. However, the market is still expecting more macro stimulus measures in the future, such as expanding fiscal spending and coordinating measures with provinces to solve the real estate problem. The two sessions, scheduled to be held from March 5, will be the focus of market attention.
At present, the consensus expectation is still to expect MSCI China EPS to grow by 13% to 16% in 2024 and 2025, while we expect it to grow by 10-11%, compared to the more optimistic market expectations. As the consensus expectations of the market have not eased over the past few monthsIn our view, earnings for some companies may miss expectations in the upcoming March earnings season, limiting market gains in the near term。Margin and sales growth may continue its recovery trend, but it may not be as fast as expected.
On January 23, Bloomberg reported that China** was considering a US$319 billion bailout plan to stabilize the declining A** market. The funds are presumed to come from offshore accounts of Chinese state-owned enterprises totalling 2 trillion yuan (about US$278 billion). According to reports, companies known as national teams such as China Securities Financial Corporation or ** Huijin Company will also provide an additional 300 billion yuan (about 41 billion U.S. dollars) from the onshore market.
We believe the plan alone will not turn things around, but it may be a sign that sentiment has bottomed out. First, we are not sure whether offshore Chinese SOEs have RMB2 trillion of free cash flow to put into the A** market. The amount of 2 trillion yuan is very huge, equivalent to 33%, 77%, which is also equivalent to 2. % of the 1-year average daily volume in the onshore market3 times.
According to our preliminary estimates, the top 50 Chinese SOEs listed in Hong Kong had about RMB13 trillion in retained cash as of the end of June 2023. About 80% of this balance is held by Chinese banks, and the willingness to hold ** is low because the investment will be too burdensome on the bank's capital. For the remaining 24 trillion yuan in cash, most of which are onshore RMB deposits. In other words, these companies could use onshore deposits to meet the needs of the plan, but that would deplete their cash, and they would have to put their capex on hold for the bailout dividend plan. This makes it seem unlikely that the plan will be implemented. If confirmed, it would be funded on a large scale (more than the similar bailout in 2015, equivalent to about 8% of the free-float market capitalization) and is expected to boost both onshore and offshore** sentiment.
Tactics are easy to chance
We expect both onshore and offshore** to stabilize around current levels (around 15,000 for the Hang Seng and 3,200 for the CSI 300). However, it may be too early to see this as a foregone conclusion. Investors have suffered several heavy losses in the last year and usually tend to take profits when the market is **. In addition, given the huge inflows that China has recorded in the past few years, foreign investors have also taken significant losing positions in the market.
Editors: We note that short covering and closing of underweight positions drove tactical**. In addition,Very low valuations (P/E and P/B ratios below 1 standard deviation and near 10-year lows) could limit downside risks。However, China is still likely to be a short-term trading market until a more comprehensive stimulus package is implemented to reinvigorate overall demand and confidence, or a comprehensive plan is developed to address the challenges in the housing market.
Edit
EditIn terms of short-term tactics, we expect the offshore market to outperform the onshore market as the former has a higher beta and is more oversold。Based on our current position and risk tolerance, we propose the following strategy: For investors looking to play tactically** or increase beta risk, we prefer high-quality blue-chip stocks with frustrated valuations that are likely to be strong** when the market recovers.
For investors who prefer to wait on the sidelines for more clarity, consider stable companies with strong balance sheets and stable dividend payouts, and SOEs can also be used as a hedge tool or can benefit from SOE reform policies in the long term. From a broad portfolio perspective, we recommend a neutral allocation to the China market, which is about 4-5% of the allocation. Significant overweights to this market may allow investors with a local bias to diversify their funds into the global sector, and trading with structured product strategies can also increase the predictability of their exposure.
Conclusion
Against the backdrop of multiple challenges facing China's economy, we have witnessed efforts to take proactive steps to support the market. From the recovery of the housing market to the challenges of the export sector to the fluctuation of business sentiment, the future development of China's economy remains full of uncertainties and challenges. However, in the midst of these challenges, we also see the sprouts of opportunities. Through prudent investment strategies and flexible market responses, investors can find solid investment opportunities during this turbulent time. At the same time, the positive attitude towards the implementation of broader stimulus packages and reform measures has also laid a solid foundation for the future growth of China's economy. In these uncertain times, maintaining a cautious optimism and keeping a close eye on the market will be key to investor success.
Excerpt from the editorial article: "China Outlook 2024: Patience Required" Lead author: J.P. Morgan Asia Investment Strategy.
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