China in your hand
China’s economic growth has always been in focus among investors and economists. This is currently also the case, almost more than ever, as investors in Chinese stocks are thirsty for good news that could revert the sluggish mood surrounding the stock market in China.
It is evident that the political leadership has clear long-term goals for the Chinese economy and the society as such. However, its near-term action is unclear which was, once more, addressed at a high-end international conference in Beijing on 24th March.
The conference was opened by China’s premier minister Li Qiang with IMF managing director Kristalina Georgieva as the first guest speaker. As reported in various media, Georgieva encouraged China to boost domestic demand and also renew the Chinese growth model towards a high-quality growth model. As a response, Qiang confirmed that the government will try to grow the internal demand in China. Our assessment of the growth initiatives is they are predominately aimed at hauling over the whole industrial sector. This is positive, but it’s a long-term initiative; when it comes to action points that could improve China’s domestic demand right now, it is quieter at the political level.
However, there is a range of initiatives that could be undertaken, and it is surely interesting for investors to look out for as it would be positive for the stock markets in China.
Looking at low-hanging fruits
The big hope in the financial market is a growth package for private households financed by increasing the public deficit. We recognize that this is not as easy as it was some years back because the public debt is growing as Graph 1 shows. The deficit level has reached a point where it rightly generates some concern. Meanwhile, consumer confidence is stuck at a low level which Graph 2 shows in a historical perspective. The way out is to write the check and get consumers into the shops.
There are other action points that will be less costly, or basically are there for free. We call them the “low-hanging fruits”.
Globally, interest rates are expected to move lower so China could lower the mortgage rates already as well as lessen the down payment requirements when private individuals are buying property. When housing prices are rising in China, it is often seen that the very large cities curb the access for private households to buy property. It would make sense to remove this regulation now. All-in-all, these changes would help to stabilize the private part of the real estate market.
It is not only the mortgage rates that can be lowered. We argue that China can ease the monetary policy and cut the rates in general. There might be a consideration if it would weaken the Renminbi; we will stay optimistic and say not really as the positive domestic effects will beat the possible capital outflow risk.
It’s pretty straightforward to execute on the low-hanging fruits. We would expect it to cheer the consumers, and probably with a positive spill-over effect on the stock markets.
The fragile dream
The interesting feature is that communication from the political leadership does not include private consumption in a way that the financial markets are dreaming about. For many market participants, it just seems so obvious to deliver a private consumption boost package, though honestly, it does not seem to be in the cards. Sure, the short-term run sees the price would be an even higher public deficit, but it is a straightforward route to improve domestic growth rates. So, why not just do it?
This is a very good question, especially when one considers the exceptional sums that historically have been poured into growth-generating projects in China like public infrastructure investments.
One explanation for the low action level could be internal disagreement within the leadership group, though this is just us thinking aloud, and we leave this consideration aside right now.
We do not know if a plan for boosting private consumption is underway, though our observation is that it seems more to be a strong dream among investors than anything else. This dream might be as fragile as the China one would hold in their hands when drinking tea.
We would not recommend pushing this dream too far when considering investments in China. Instead, accept the current situation as it is and dive into the stock market to find quality investments as they are there. After all, should China’s government choose to boost private consumption, then it will just be a positive add-on for investors.
