Tentative signs that the ship is slowly turning
Our trip to Beijing and Shanghai revealed a picture of a population still scarred by COVID lockdowns but starting to embrace a much freer way of life. The proportion of people with face masks on was notably lower than in Singapore, Hong Kong and Taiwan. We believe there’s further room for recovery as the COVID trauma gradually fades.
While locals we interacted with in Beijing and Shanghai were still fairly downbeat on the economy, this was less pronounced than a few months ago. This can be explained by the authorities drawing a lower bound on growth at the July Politburo, and following that with a slew of piecemeal policies.
More easing to come if needed
A concerted nationwide property easing push really only started in late August. Tier 1 and 2 cities are broadly expected to be the biggest beneficiaries, and there is a natural time lag for policy measures to reflect in broad official housing statistics. The consensus view is that if the housing recovery is still considered too tepid, once the numbers come through in October/November, we could see another round of easing. The political rationale for this view is robust – growth targets determine policy, and Premier Li has to go in front of National People’s Congress come March to give account for 2023 and provide a growth target for 2024.
Limited concerns around local government debt issues
On issues around local government and local government financing vehicle debt, recent support driven by central government meant there was barely any near-term concern among onshore market participants who are the primary buyers of these bonds. That makes sense as kicking the can down the road is a real option for this net-savings economy, and expecting all local governments to run surpluses is clearly unrealistic.
FDI is being pulled in two directions
Among foreign multi-national corporations operating in China, European companies (autos, consumers etc.) are putting in more foreign-direct investment (FDI) to create China supply-chains for Chinese end demand, in a bid to diversify from their home markets. For US companies, getting net new FDI into China is harder these days, though companies already in China are largely staying put given the large consumer market opportunity China continues to present. Of note, on-the-ground Western press presence has significantly reduced since COVID – investors are unlikely to get a complete picture of developments on the ground from media headlines.
Asset view post trip
On the local rates side, we expect front-end rates to stay anchored to aid the recovery.
On the renminbi, while the People’s Bank of China is clearly fighting a higher USD/CNY exchange rate, the China growth narrative needs more proof in the data for the currency to outperform.
As for offshore US dollar credit, the trip confirmed our view that as the economy bases, companies’ credit spreads have room to materially tighten – we think this is most likely in the crossover (BBB/BB rated) market segment, although selectivity will remain vital.