The hoped-for Chinese economic recovery has not been as buoyant as some bulls had hoped. But investors hoping that policymakers’ aggressive stimulus will boost stocks may be disappointed.
China’s growth is certainly picking up, but in contrast to the slowdown in the United States and elsewhere, it’s not as robust as expected. That leaves the world’s second largest economy in a difficult middle ground.
Data just Wednesday showed China’s exports fell 7.5% in May from a year earlier, a steeper drop than economists expected and the first decline in three months. This, along with other recent weak indicators, has raised hopes for more stimulus to boost growth. But policy makers so far seem more intent on stabilizing rather than stimulating the economy.
Meanwhile, Chinese stocks have lost momentum, with the iShares MSCI China Exchange Traded Fund (NYSE: MCHI) down 7% over the past three months. This is a clear reversal from the fall, when Chinese stocks surged for three months after the government lifted tough coronavirus restrictions in late October.
Of course, policymakers are making efforts to support economic recovery, such as lowering deposit rates to encourage Chinese savers to spend more. But so far, these efforts don’t seem to convince homes and businesses to do so. To do that, TS Lombard’s chief China economist Rory Green says job and income prospects need to improve to restore confidence.
Ads – scroll to continue
BCA Research chief strategist Arthur Budagyan wrote in a recent note that consumer spending is likely to continue growing after COVID-19 restrictions are lifted, but at a slower pace than in the past. Stated. That could mean rethinking how much investors are willing to pay for consumer stocks that are currently trading at high prices.
When it comes to companies, mainland Chinese companies are among the most indebted in the world, Budagyang added. Add to this the lack of government stimulus and sluggish demand, and these companies will be in no hurry to invest, expand or hire. This could be a further obstacle to continuing the economic momentum.
For now, Chinese policymakers are in “wait-and-see mode” as to whether the economy will pick up momentum on its own, said Shezad Kazi, managing director of research firm China Beige Book.
Ads – scroll to continue
If second-quarter growth disappoints, Kazi expects the Chinese government to come up with more stimulus measures. TS Lombard’s Green also expects further steps, including speeding up the use of municipal bond lines, lowering bank reserve requirements to facilitate lending, and lowering down payment requirements to help the real estate market.
But it is unclear whether such measures will accelerate growth. And the Chinese government remains wary of exacerbating long-term challenges it has grappled with in recent years, including high levels of debt across the economy, including at the local level, financial speculation, and a glut in the property market.
Another reason China cannot rely on the old strategy of relying on infrastructure and construction to grow its economy is that there may not be enough blue-collar workers to take on these projects. The manufacturing sector is expected to face a shortage of 30 million workers by 2025, Budagyan said.
Ads – scroll to continue
The silver lining: China will likely continue to roll out efforts to cap economic growth, even if the economic recovery overwhelms those hoping for a much stronger recovery.
China could become relatively attractive if the U.S. economy starts to falter further, which is why some investors are eyeing it for now.
Email Reshma Kapadia at reshma.kapadia@barrons.com.
