Chinese investors will be asking these 3 questions in 2024

CHONGQING, CHINA – JANUARY 2: People visit the 2nd International Light and Shadow Art Festival at Fine Arts Park on January 2, 2024 in Chongqing, China. The 2nd International Festival of Light and Shadow Art takes place from December 29th to January 7th. (Photo by VCG/VCG via Getty Images)

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BEIJING – Despite strong growth, China’s investment story has been overshadowed by longer-term problems and tensions with the US over the past year.

These uncertainties persist as 2024 begins. The country is also moving into new territory as it begins to settle into a lower growth range after the double-digit pace of previous decades.

Here’s what investors are looking at next year:

Will there be an incentive?

Despite all the geopolitical risks, China’s appeal as a fast-growing market has waned as the economy matures.

Many were disappointed when China’s economy did not rebound as quickly as expected after the end of Covid-19 controls in December 2022. Outside of tourism and certain industries like electric cars, 2023 has been a story of slow growth for most of 2023, dragging down. problems with real estate and a slump in exports.

Several international investment banks changed their growth forecasts for China several times last year. After all this back and forth, the economy is widely expected to grow by around 5%.

“Policy response is necessary to consolidate the momentum of the recovery,” Citi analysts said in a Jan. 3 note.

As early as January, they expect the People’s Bank of China could cut rates such as the reserve requirement ratio — the amount of funds lenders must hold as reserves. They also estimate that total GDP could grow by 4.6% this year.

Beijing has announced a flurry of gradually supportive policies. But it took time to see a clear impact.

For people who have already (invested) in China and stuck with it for 2023, it is the belief that the catalyst is coming.

Jason Hsu

CIO, Rayliant Global Advisors

“We believe asset stabilization, a clear end to deflation, better policy execution and communication would all be necessary to revive confidence, with stimulus necessary and good reforms welcome,” Citi analysts said. “The risk is that markets may not be patient enough with reforms.”

In mid-December, China’s top officials held an annual meeting to discuss economic policy for the coming year. Official data did not indicate significant stimulus plans, but listed technological innovation as the first area of ​​work.

Among major upcoming government meetings, Beijing is due to unveil detailed economic targets during a parliamentary session in early March.

“For people who have already (invested) in China and are sticking around for 2023, it’s a belief that the catalyst is coming,” Jason Hsu, chairman and chief investment officer of Rayliant Global Advisors, said in late November. .

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“They don’t really focus on the fundamentals of the companies in the markets,” he said. “They’re just betting on pure monetary and fiscal policy to prop up the economy and the stock market.”

But whether China will support growth in the same way as before remains to be seen.

“My framework is that China will not provide significant stimulus,” Liqian Ren, head of quantitative investments at WisdomTree, said in late November.

“Even if China has a meeting, even if it comes with a good package, I think a lot of that stimulus is limited by this framework of trying to improve Chinese growth,” she said, referring to Beijing’s efforts to promote “high-quality” rather than growth-driven debt.

What happens to real estate?

Real estate is a prime example of a debt-fueled sector that accounts for about a quarter of China’s economy.

The property market plunged after Beijing cracked down on developers’ high reliance on debt in 2020. The industry’s close ties to local government finance, the construction supply chain and household mortgages have raised concerns about spillovers into the wider economy.

The pace of demand decline has slowed and we expect to see somewhat more stability in 2024.

“The slump in China’s real estate has been the biggest drag on its economy since the end of zero-Covid restrictions at the end of 2022,” Goldman Sachs analysts said in a Jan. 2 report. “Property sales and construction starts fell in 2021-22 and continued their net decline in 2023.”

“However, the pace of demand decline has slowed and we expect to see somewhat more stability in 2024,” the analysts said.

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Commercial home sales for 2023 fell 5.2% in November from a year earlier, according to the National Bureau of Statistics, accessed through Wind Information. That’s after those sales fell 26.7% in 2022.

Although the real estate situation is “gradually stabilizing, it is hard to see a turning point,” said Ding Wenjie, global equity investment strategist at China Asset Management Co., according to a Mandarin translation of her remarks to CNBC.

It expects political support to increase in 2024 as authorities shift from a focus on risk prevention to promoting progress while maintaining stability. Ding was referring to the new official language that appeared in a report from a high-level cabinet meeting in December.

Where are the opportunities?

While it is clear that Beijing would like to reduce the real estate sector’s contribution to China’s GDP, it is less certain whether the new growth stimulus can fill the void.

Machinery, electronics, transportation equipment and batteries together contributed to 17.2% of China’s economy in 2020, Citi analysts said.

That means such areas of manufacturing could offset the slowdown in real estate, analysts said. But they pointed out that economic transformation cannot happen overnight, as it requires addressing the skills mismatch in the labor market and adjusting the supply chain that has been built to support real estate development.

“If technical penalties were to become a binding restriction on new drivers, their potential to offset the asset shortfall would not be realised,” the report said.

Despite macro challenges, Beijing has signaled it wants to boost domestic technology and advanced manufacturing.

China AMC’s Ding said the high-end manufacturing sub-sector could benefit this year from a recovery in the global technology cycle. Examples include those related to consumer electronics and computers.

It also expects producer prices to return to growth at the end of the second quarter, boosting earnings per share by around 8% to 10% in China. Another area her team is looking at is Chinese companies that are growing global revenue.

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