Those expectations were dashed as early as May when it became clear the recovery had faltered, mainly because of the severity of the crisis in the all-important property sector. Excessive optimism quickly gave way to an abundance of pessimism. This proved fertile ground for bearish narratives, even flawed ones such as the claim that China is experiencing Japanese-style deflation and stagnation.
There are good reasons investors have turned bearish on China. The severe loss of confidence in the real estate market – which before the crisis struck accounted for more than a quarter of economic output and remains the biggest source of household wealth – has made investors more sensitive to China’s deep-seated problems. This has fuelled concern about the efficacy of policy measures to support growth and, more worryingly, the growth model itself.
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Boom, bust and borrow: Has China’s housing market tanked?
Boom, bust and borrow: Has China’s housing market tanked?
Sentiment towards China has deteriorated dramatically. On October 20, the CSI 300 index of Shanghai- and Shenzen-listed stocks erased all its gains during the fierce reopening rally that began in November last year. According to data from JPMorgan, foreign investors are exiting China “at a rapid pace”, with net outflows from direct investment and portfolio accounts reaching a staggering US$145 billion during the past year.
However, the pervasive bearishness is amplified by the fact that expectations were too high to begin with. By March, Citigroup’s Economic Surprise Index – a gauge of how often data comes in above or below expectations – for China had reached its highest level since 2006, reinforcing the perception the economy was roaring back. However, the index was deep in negative territory by July. The shock of an abrupt slowdown had a damaging effect on sentiment.
This raises the question of whether excessive optimism has been supplanted by undue pessimism. It is important to distinguish between the economy and markets, whose paths often diverge. There is a case to be made that Chinese assets could perform relatively well next year.
First, economic data is beating expectations again, albeit modestly. Industrial profits in October rose for the third straight month while retail sales grew faster than anticipated, driven by car sales, spending on household electronic appliances and information and communication equipment.
While the recovery remains weak, improving economic performance has become more important for investors. According to JPMorgan, markets are reluctant to price in stronger growth beyond the latest batch of statistics, unlike at the end of last year when investors began to “price in a cyclical upturn way ahead of actual data surprises”. Simply put, stronger-than-expected data increases the scope for a meaningful rally.
Second, policy is becoming less restrictive, particularly in the ailing property sector. Beijing is drawing up a list of 50 developers – including some of the most distressed builders, such as Country Garden Holdings and Sino-Ocean Group – eligible for financial support. The financing could even include unsecured short-term loans as pressure on the government to find ways to help developers deliver unfinished homes becomes more acute.
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The People’s Bank of China is also expected to provide 1 trillion yuan (US$140.8 billion) of low-cost funds through policy and commercial banks for development projects. Nomura, one of the most bearish voices on China, said “Beijing might have finally recognised the need to introduce [quantitative easing] or money printing for the collapsing property sector.” While economists have their doubts about stimulus, markets want more of it, suggesting sentiment could improve if the government acts more forcefully.
Third, it is not all about property. The Beijing Stock Exchange 50 Index – a gauge of early-stage technology companies listed in Beijing – is up more than 50 per cent from its October 23 low. Stocks in sectors set to become new drivers of growth, such as electric vehicle and battery makers, renewable energy and consumption-related industries, are outperforming the benchmark index.
An employee works on an assembly line at a factory of Chinese electric vehicle manufacturer Li Auto, in Changzhou, Jiangsu province, on February 15. Photo: Xinhua
Goldman Sachs even has an overweight position in China’s A-share market – publicly listed Chinese companies trading on Chinese stock exchanges – to gain more exposure to “self-sufficiency” and “rebalancing” themes.
Fourth, betting against consensus views in markets this year paid off handsomely. The much-anticipated recession in the United States has yet to materialise while stocks have trounced government bonds.
Having been wrong-footed, investors are more likely to hedge their bets next year. Bank of America includes the outperformance of China’s economy in 2024 as one of several “tales of the unexpected” that investors should bear in mind.
What is clear is that Chinese markets have been full of surprises in the past year. This calls for a healthy dose of humility among investors. Excessive optimism late last year proved costly. Too much pessimism heading into 2024 could also be a grave mistake.
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