The MSCI China Index has come off its January lows and is now back in positive territory year to date, demonstrating how the world’s second-largest economy has “held its ground in recent months”, according to Sandy Pei of Federated Hermes.
Noting the MSCI China Index traded flat for the first quarter of 2024, it remains “well off” its early-quarter lows, she said, gaining almost 30 per cent since the end of January.
Earlier this week, the International Monetary Fund (IMF), too, revised its economic growth projections for the Asian giant. It now stands at 5 per cent, up from 4.6 per cent, for 2024, credited to strong GDP data for the first quarter of the year along with recent policy measures.
The IMF said risks are tilted to the downside, including from longer-than-expected adjustment in the troubled property sector.
According to IMF managing director Gita Gopinath, China’s economic growth is projected to remain “resilient” in 2024 and slow to 4.5 per cent in 2025. Inflation is expected to rise but remain low, with core inflation expected to increase gradually to average 1 per cent in 2024.
“The ongoing housing market correction, which is necessary for steering the sector towards a more sustainable path, should continue,” she said.
“The authorities have implemented various welcome measures to guide the property market transition, including recent policy announcements regarding lending support for affordable housing. A more comprehensive policy package would facilitate an efficient and less costly transition while safeguarding against downside risks.”
She said the Chinese government should prioritise mobilising resources to protect buyers of pre-sold unfinished homes and accelerate the completion of unfinished pre-sold housing, “paving the way for resolving insolvent developers”.
“Allowing for greater price flexibility while monitoring and mitigating potential macro-financial spillovers can further stimulate housing demand and help restore equilibrium,” Gopinath said.
She stated the monetary policy easing implemented so far this year is “welcome” but flagged scope for further easing given output falling below potential and subdued inflation.
“Greater exchange rate flexibility would reduce deflation risks and help absorb external shocks,” she added.
Federated Hermes’ Pei agreed there are “signs of sequential improvements of macro data” with monetary easing and selective fiscal provision put in place in the end of 2023 taking effect.
“China has seen liquidity injection since late 2023 and a change of its monetary policy stance to easing. Accelerated dividend payouts and share buybacks are also providing a strong floor for share prices to stand on,” she said.
Chinese cost competitiveness in terms of innovation and product design has also grown, Pei observed, most notably in the auto, smartphones, home appliances, and renewables industries.
These companies have also made inroads in international markets despite geopolitical tensions and regulatory hurdles, such as in Southeast Asia, Latin America, and the Middle East where Chinese brands have made strong strides in gaining market share.
“Capital reform is high on the regulator’s agenda, which is positively viewed by the market. The regulators have announced a series of supportive policies including showing strong commitment to support a soft landing of the property market and managing the impact on the overall economy, with investors now eagerly awaiting their implementation.
“Consumption stimulus, such as subsidies for home appliances and autos, are also positive signals for China,” Pei said.
However, China is still trading at close to a historical high discount to global equities and a number of headwinds remain for the Asian giant, including geopolitical tensions.
AMP’s Shane Oliver recently flagged that a Trump victory will come with economic implications, given the presidential candidate is currently threatening to impose a 10 per cent tariff on all imports and a 60 per cent tariff on Chinese imports, which would take the average US tariff rate from around 2.5 per cent to around 17 per cent, surpassing the 3 per cent peak seen in his first term.
Still, Pei is not entirely pessimistic on investing in China.
“The current risk and reward trade-off in China remains a very attractive proposition for investors who have limited downside if using yield as a floor. There is also a huge upside for investors against longer term-based valuation, as well as a potential re-rating to a normal multiple of Chinese equities,” she said.
“China’s comeback story is in full swing and it may pay to be a contrarian in this market.
“With favourable regulations and global expansion of key industries, like manufacturing and electric vehicles, the outlook is bright.”
