The Chinese patient
There’s no stopping the fall in Chinese equities. In 2023, the MSCI China lost 14% in euro terms, continuing the slide seen in 2021 and 2022.[1] Over a cumulative three-year period to 18 January 2024, losses rose to 44%, whereas global equities were up 40%. Even once-popular technology stocks are now in turmoil. Ali Baba, for example, has fallen almost 70% since the beginning of 2021.1
The Chinese currency is also feeling the pressure, having lost 10% against the dollar in the last three years.1
The main reasons appear to be overzealous anti-Covid policies, disruptions in production chains, unpredictable and harsh state policies towards businesses – particularly in the tech industry –, protectionist measures put in place by the United States, and an economic rebound in early 2023 that immediately ran out of steam. The primary cause, however, is the seemingly endless property crisis. Despite a range of support measures over the past two years, including the highly risky prohibition on banks’ lending more to property developers, activity has not picked up. Floor space sold in 2023 fell by 12.7%.[2] Prices for new residential buildings in China’s 70 largest cities fell by 0.9% in 2023, after having fallen by 2.30% in 2022.2 Older residential buildings have fallen even more.
Added to a demographic decline that has only just begun – two million fewer Chinese in 2023 – and a total debt (public and private) to GDP now reaching record levels (360% at the end of 20221), the situation looks as catastrophic as it did promising in China’s heyday of just a few years ago.
So is the situation hopeless? No. China will continue to enjoy considerable advantages well into the future.
Firstly, its structural growth. Even with one central pillar of its economic model – property – facing significant trouble, GDP growth in recent years has remained solid, at least according to official figures. Over five years, despite Covid, average growth came in at 5.2%1, and is set to fall just short of this in 2024 (Bloomberg consensus). This is still by far the highest growth rate of the major economic blocks, and will probably remain so for many years to come. At around 6%1, India is certainly doing better, but its overall level of wealth is still much lower.
Secondly, monetary policy. Although Chinese government yields have fallen sharply over the past three years, they remain markedly positive, leaving ample room to increase the degree of monetary stimulus if necessary. The People’s Bank of China may be seen as too timid in its support, especially since headline inflation has been negative for a number of months. However, it may simply be treading with care to avoid over-stimulating the economy and thereby stoking equally harmful inflation, as recently seen in the West. Instead, its approach is to stimulate the economy by adjusting banks’ reserve requirements, which have indeed been lowered. Lastly, core inflation remains positive at around 0.60% per annum. China’s prudent monetary policy has allowed it not only to avoid inverting its yield curve – unlike Western central banks – but also to maintain levels consistent with nominal growth of 5%. If Western countries had the same level of growth, key rates of 2% would not seem restrictive.
Despite these two strengths, investor weariness isn’t going anywhere. As long as the property crisis persists, the risk of a banking crisis will weigh heavily on the stock market and household morale. This may stay the same for a number of years to come.
But therein lies the potential for an exceptional recovery. Admittedly, the challenges facing China over the very long-term, especially those relating to demographic, geopolitical and governance concerns, won’t be resolved by the current measures. However, once the property market has stabilised, even the slightest piece of good news will be greeted with enthusiasm inversely proportional to the current excess of mistrust. China has time on its side. Investors in too much of a hurry should try to find some as well.
Final version of 19 January 2024 Alexis Bienvenu, Fund Manager, La Financière de l’Echiquier (LFDE).