Weak data, limited stimulus keep investors away from China

SINGAPORE, Jan 17 – China’s patchy economic growth and a renewed slump in home sales have redoubled investors’ resolve to steer clear of the country’s markets, sending shares tumbling as foreigners quit in the absence of fresh policy support.

Gross domestic product growth was 5.2% for 2023, hitting Beijing’s target and market expectations. But December data also published on Wednesday showed the fastest fall in home prices for nine years, an 8.5% annual slide in sales by floor area and a collapse in housing starts.

Global money managers — who have been sellers of Chinese stocks as the post-pandemic recovery has sputtered — say it will take a long time or a lot of stimulus to repair a sector once accounting for a quarter of the economy, and change their minds.

Foreigners have already sold a net 12.4 billion yuan (USD 1.7 billion) of Chinese shares this year via the trading link with Hong Kong and more followed on Wednesday with China’s blue-chip index down more than 2% to a five-year low.

Hong Kong’s Hang Seng slid toward its largest single-day loss in 15 months after the China data, dropping 4% to its lowest in more than a year.

The price-to-earnings ratio of the index, a widely-used valuation measure, is a paltry 7 and its lowest in at least a decade, compared with 22.2 for the S&P 500.

“Today’s data follows a consistent trend in the recent few months,” said Ken Peng, head of investment strategy in Asia at Citi Global Wealth, at an outlook briefing in Singapore.

Retail sales missed market forecasts and fixed-asset investment topped them, he said, but government efforts at supporting innovation and manufacturing are not yet enough to offset the drag from a deepening slide in real estate.

“The Beijing government seems to think that the market and economy have not gotten to a point that’s bad enough to warrant a kitchen-sink policy response,” Peng said. “It’s the timing and policy response uncertainty that bothers a lot of investors.”

NARRATIVE TRAP

Performance has also been dismal, with mainland shares lagging global stocks for three years, and surging markets in India, the US and Japan offer reason to leave.

Intense focus has fallen on some sort of demand stimulus – however unlikely – as the trigger to draw investors back.

Sid Mathur, head of Asia macro strategy and emerging market research at BNP Paribas, calls it a “narrative trap” that’s grown after Chinese policymakers doled out large and targeted fiscal stimulus during downturns in the past few decades.

It’s different now, he says, with the stimulus of a lower magnitude and aimed “much more to contain downside risks to long-term growth than to maximize short-term growth”.

Economists have noted, too, that infrastructure spending and targeted support for green or high-tech manufacturers fail to confront the confidence crisis that’s been unleashed by the collapse in home prices.

“It’s true Chinese authorities have rolled out stimulus measures to prop up the economy, but the effects have hardly played out … because the same old infrastructure spending has been overdone in the past two decades,” said Toru Nishihama, chief economist at Dai-Ichi Life Research Institute in Tokyo.

To be sure, the depth of negativity around China suggests some kind of bounce is due and technical indicators show stock markets in over-sold territory. China’s bond market has also been rallying and drawing foreign investment.

But sentiment is so fragile that sustained recovery or the return of long-term, long-only investors seems distant.

“Pessimism in China is all but entrenched now,” Bank of America analysts noted in a survey of 256 Asia fund managers published on Tuesday, with almost 70% of respondents either in wait-and-see mode or looking elsewhere.

(USD 1 = 7.1965 Chinese yuan)

(Additional reporting by Tetsushi Kajimoto in Tokyo and Vidya Ranganathan in Singapore; Editing by Kim Coghill)