Emerging Markets: Concerns Grow About China Growth

Emerging Markets, IMF editions, October 2015

Concerns about China’s long-term growth are mounting, with a major Asian bank significantly downgrading its outlook for the country’s economy. But fund managers are beginning to see value in the battered equity markets.

This week Nomura downgraded its GDP forecast for China in 2016 to 5.8% from 6.7%, while also modestly trimming its forecast for the 2015 full-year from 6.9 to 6.8%.

Yang Zhao, head of China economic research, said that unlike many others he did not doubt the official figure of 7% growth for the first half of 2015, but said the number “sent a clear signal that economic growth is not that good.” The financial sector contributed 1.4 percentage points of that growth rather than a more common 0.6, he said, reflecting the equity bubble in the first half of the year, which has since burst. “Growth in the real economy was much lower than 7%,” he said.

He added that property investment growth “is the main drag for economic growth and remains pretty severe.” The figure stood at 3.5% for the first nine months of the year, down from 11% last year and 20% the year before. “Next year it might turn negative for the first time since 1997,” he said, with a consequent drag on other sectors.

Zhao said he expected accommodative monetary stimulus in 2015, with four 50bp cuts to the bank reserve requirement ratio, and two 25bp benchmark rate cuts.  He said that he would not characterise the slowing growth as a hard landing since systemic risk remains controllable, but said China should expect heightened financial and unemployment risks, higher non-performing loans, and increased bond defaults.

However, while the economic growth outlook appears increasingly bearish, investors are starting to look at China’s stock markets with an eye to value following a 25% fall in the CSI300 index since July 23.

“Investors have been quick to downgrade growth forecasts for this year and next, but we believe some of this anxiety may have gone too far,” said Jade Fu, investment manager at Heartwood Investment Management.

“We continue to see an economy that is growing and not collapsing. There has been an overwhelming focus on manufacturing data disappointments in recent months, which has fuelled the bearishness among investors, but it should be remembered that China is running a two-speed economy as it rebalances towards domestic demand.” She favours the retail and services sector over industrials.

Nomura’s own equity strategist, Wendy Liu, has been calling for investors to overweight tech and telecoms companies in China, and is expecting the MSCI China index to return to its April 2015 levels by early next year.

However, the overwhelming view is cautious. Sonja Laud, income investment director in the Global Multi-Asset Group at Baring Asset Management in London, said China was impacting assets across emerging markets. “Regional markets are particularly affected, given their dependency on exporting commodities to China,” she said. “As a consequence we take a defensive stance towards this region” in favour of developed markets.

Zhao said one possible upside to his forecast was if China decided that a likely growth level of below 6% was unacceptable, and so implemented a stronger than expected stimulus package. “But that is a small probability event,” he said.