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Investor Reactions to China’s Economic Downswing

The Global Impact of China’s Slowing Economic Momentum.

Amid China’s underwhelming economic performance in the first half of the year, investors are positioning themselves to potentially profit from an anticipated short-term injection of stimulus. However, long-term structural issues pose an obstacle to lasting market upticks.

China’s economy has been displaying signs of slowing momentum in Q2, following an initially promising recovery in the aftermath of the pandemic. Exports are dwindling as overseas demand cools, and an enduring slump in the property market is eroding confidence.

According to Reuters, these negative indicators have amplified concerns that China may fall short of its relatively modest 5% growth objective for 2023, thereby fuelling speculation of a more robust stimulus intervention following the upcoming July Politburo assembly of leading Chinese officials.

Jun Bei Liu, portfolio manager at Tribeca Investment Partners in Sydney, opines that for China, the current scenario can be summed up as, “bad news is good news.” Liu foresees greater stimulus measures, particularly focused on cyclical sectors such as housing. Liu also expressed an interest in the services sector, predicting an eventual uptick in demand once the world settles into the post-pandemic phase.

However, even prior to the release of the latest growth data, a variety of weak economic indicators had suggested China’s recovery was not meeting expectations, leading to an abrupt halt in emerging stock market rallies. The primary CSI 300 index is currently down 0.5% for the year, a stark contrast when compared to the 16% rise in global stocks.

Concerns regarding China’s cybersecurity crackdowns and disputes with the US over chips and rare metals have compounded growth anxieties. These issues resulted in an outflow of foreign investment, with foreign investors selling 2.7 billion yuan ($374.47 million) of Chinese shares in Q2, a sharp reversal from the record 186 billion yuan they invested just a quarter before.

In spite of these challenging conditions, the potential for substantial stimulus, which has up to now been a sporadic combination of a single rate cut and some easing of loans for the property and state sectors, is enticing certain investors.

Marcella Chow, global market strategist at J.P. Morgan Asset Management, believes that the weak growth outlook and the scarcity of policy stimulus are already factored into current prices. She suggests that any slight improvement in growth and policy conditions could initiate a shift in market sentiment. According to Chow, the primary beneficiaries of this turnaround may be cyclical sectors such as consumer discretionary, materials, and property.

Goldman Sachs analysts, led by Kinger Lau, consider the case for a ‘tactical market recovery’ persuasive and anticipate a 15% 12-month return for the CSI300. Meanwhile, JPMorgan has revised China’s 2023 growth forecast downward from 5.5% to 5%, while projecting a more severe contraction of 20% in new construction for this year.

Potential measures the government might employ to stimulate economic growth include an additional policy rate cut and nationwide easing of housing policies, such as a reduction in down-payment requirements. Mike Kelly, head of multi-asset at PineBridge Investments, likens the anticipation for the upcoming Politburo meeting to the observation of the Federal Reserve’s actions, known colloquially as “Fed watching.”

However, Alicia Garcia Herrero, chief economist, Asia Pacific at Natixis, cautions that any future policy support is likely to be limited and targeted, due to rising debt risks and recent official speeches. Herrero expresses skepticism about the potential effectiveness of fiscal policies, given China’s high public debt and the reduced efficacy of these measures.

Eugenia Victorino, head of Asia strategy at SEB, shares Herrero’s prediction of targeted support but remains optimistic that recent policy initiatives such as June’s rate cuts will start to have a positive effect in the following months. Victorino also points to Beijing’s latest statements advocating increased support for private enterprises and the seeming conclusion of a lengthy regulatory crackdown on the tech sector as potential market-boosting factors.

However, Nomura analysts led by Ting Lu caution that even with the stimulus, the situation may not reverse due to lackluster confidence and a negative market sentiment. They suggest investors temper their hopes for a rapid, comprehensive solution and brace for a growth slowdown that may drop below 4.0% in 2024.

Topics: Impact of China’s Economic Slowdown, Anticipated Stimulus Measures in China, Investor Reactions to China’s Economy, Global Market Implications of China’s Economic Performance, Investing Strategy Amid China’s Economic Deceleration

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