On the Minds of Investors
24/10/2019
Should we be worried about Chinese growth?
Last week, China released its 3Q19 Gross Domestic Product (GDP) figure along with a slew of key monthly economic indicators. The overall picture was soft, real GDP growth slowed to 6.0% year-over-year (y/y) from 6.2% in 2Q19 and below the consensus forecast of 6.1%. The higher frequency monthly indicators were mixed. Fixed asset investments (FAI) remains on a downward trend, contrasting stabilization in consumption and industrial production.
The ongoing trade dispute between the U.S. and China remains to be the key factor weighing on business sentiment and the manufacturing sector. Growth in the manufacturing and mining sectors (secondary industries) slowed to 5.2% y/y from 5.6% in 2Q19. A fact that was corroborated by the monthly industrial production figures where the drag on economic activity originated from auto output and exports.
Private investments have also extended its slowdown, offsetting renewed government fiscal boost and bringing down overall investment growth. Business sentiment continues to be pressured by policy uncertainties stemming from the geopolitical rivalry between the U.S. and China. As a result, manufacturing and private FAI growth extended their slide, dragging down the overall FAI growth to 5.5% y/y in September, below that of August and consensus expectations. On the other hand, state-led investments accelerated in September as infrastructure FAI growth sped up to 4.5% y/y versus 4.2% in the previous month, indicating rising momentum in fiscal spending.
However, it is not all bad news. A higher growth rate in the services component of 3Q19 GDP growth (7.2% y/y vs. 7.0% in 2Q19) suggests that domestic demand is holding up, but consumer purse strings may tighten as food prices rise. While we see a stabilization of monthly retail sales data, recent inflation data shows a worrying trend. The headline Consumer Price Index rose by 3.0% y/y, the highest in five years. Within its components, food prices stood out in particular, increasing by 11.2% y/y in September, likely supported by the staggering 46.9% hike in meat prices over the same period. Thus, spending patterns will have to be monitored for any signs of a pullback in consumer spending, which will weaken the broad economy further.
Despite the disappointing economic data, the expectation is on the rise for stronger stimulus ahead. Thus far, we have seen an accommodative People's Bank of China (PBoC), which has injected several rounds of liquidity, lowered financing costs and guided major banks to lower the new loan prime rate in September. On the fiscal end, spending power of local governments has been given a boost by ramping up issuance of special local government bonds and greater flexibility in usage of the funds to support infrastructural projects. Looking forward, investors will have to await for a series of important meetings before the end of this year, such as the upcoming Fourth Plenum of the 19th Central Committee, for any indication of additional stimulus policies.
EXHIBIT 1: CHINA FIXED ASSET INVESTMENT
YEAR-OVER-YEAR CHANGE
Source: CEIC, National Bureau of Statistics of China, J.P. Morgan Asset Management.
Guide to the Markets – Asia. Data reflect most recently available as of 30/09/19.
Investment implications
The latest data points to continuous pressure on Chinese economic growth. Despite the potential mini deal, most of the U.S. tariffs on imports from China still remain, which will continue to weigh on Chinese exports. Pressure on investment growth might also emerge as property market controls continue. Therefore, we will likely see continued policy support from authorities where front-loading local government bond issuance, supported by PBoC’s liquidity injection, might be the key stabilization initiative in November and December.
Under such circumstances, investors are advised to take a more active approach in sector and company selection within China. We continue to prefer sector leaders which are more domestically-driven and have less exposure to the uncertainties of the trade talk outcome. Current valuation of Chinese stocks remains attractive to long-term investors. As China continues opening up its financial markets, foreign investors are attracted by the relatively lower valuation of equity and higher yields of government bonds. The inflow of foreign capital will also lend some support to stocks with strong fundamentals.
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