Chinese stocks are up sharply. However, a lasting recovery of the economy does not seem likely.
Despite price fireworks, Chinese stocks still lag behind
At the end of September, China’s leading CSI 300 index recorded a meteoric peak of 33% in six trading days. However, the Chinese stock market still clearly lags behind the global stock index since the start of 2021. The main reason for this weak performance is the real estate crash in the Middle Kingdom. Since April 2022, house prices have continued to fall and are, on national average, approximately 20% below their record levels. The bursting of the real estate bubble has multiple consequences. With Evergrande, Country Garden and Fantasia Holdings, no less than three major real estate developers found themselves in difficulty: some had to file for bankruptcy.
Commercial banks then recorded significant credit losses. Nearly a quarter of the Chinese economy depends directly or indirectly on the construction and real estate sector, the decline has also been felt on the job market. The youth unemployment rate, which reached 18.8% in August, poses a growing socio-political threat to the Beijing government. Added to this is the fact that most Chinese have invested by far the largest part of their wealth in their own real estate. Due to the lack of investment alternatives, the stone was considered a safe investment. The correction in real estate prices led to a negative wealth effect. In response, savings rates continued to grow in the Middle Kingdom.
China, nation of savers
The Chinese put aside almost 45% of their disposable income – a figure that eclipses even savers countries like Switzerland (14.9%), Germany (11.3%) and the United States (3.7%). %). Several factors lead the Chinese population to save significantly and over the long term. This involves on the one hand compensating for losses in the value of real estate and on the other hand addressing the shortcomings of the social security system in China. The Chinese thus have significant savings, but the majority of these are put aside for their retirement provision.
Limited room for maneuver
Despite the Chinese government’s stated desire to get its economy back on track, its room for maneuver remains weak. At the end of September, the Chinese central bank (PBoC) announced various monetary and fiscal support measures to revive its relatively paralyzed economy. Since then, key rates have been sharply reduced to stimulate the property market, additional liquidity has been made available to banks and buyers now have to raise less equity when purchasing a property. However, it is not certain that the hope of market players to see the economy of the Middle Kingdom stabilize sustainably will materialize. Because on the economic level, China is in a balance sheet recession. To counter it, consumption should be revived by reducing income taxes and consumption taxes. However, the debt of the central administration, which amounts to around 88% of GDP, and the mountains of debt accumulated by the provinces and state-controlled companies limit the government’s room for maneuver. The structural problems of the Middle Kingdom cannot be resolved as quickly as desired. In the long term, demographic developments, trade wars, geopolitical tensions and deglobalization trends are other elements that also harm the world’s workshop.
From the point of view of the international investor, caution remains in order towards China. The recent price rally should, once again, prove to be a flash in the pan because the dragon remains under attack. For global investors, there are more attractive stocks than Chinese stocks right now. Those who nevertheless expect a recovery in consumption in the country can bet on stocks exposed to China, such as those of European brands in the luxury sector which are currently on sale at sale prices.
