Who blinks first? When opponents stare into each other’s eyes, the one who moves their eyelids first is seen as the weaker party. Following Antony Blinken’s recent Beijing visit, the first one by a US Secretary of State in five years, it is hard to decide who blinked first.
In any case, the occasion seemed to be more about the two superpowers agreeing to revive their relationship after the temperature had fallen to an all-time low. This is good for the world, good for the world economy, and good for financial markets.
China’s recovery under threat
Yet the bigger issue for all three is whether China’s policymakers will finally open their wallet and apply some stimulus measures, as the Chinese economy is losing steam by the minute following the re-opening push. This has a lot to do with the ailing housing market holding back Chinese consumers. So far, policy support has been offered through the corporate channel only, and this lever seems pretty much exhausted.
The latest economic data out of China suggests that after a stronger-than-expected rebound in the first quarter of this year, the economic recovery momentum faded quickly in April and May. The recovery has been narrowly concentrated in the services sector, and activity in the important real estate sector is showing renewed weakness after a brief recovery in the first quarter.
Unless some big-time monetary and fiscal stimulus is offered on the consumer side, we are quite concerned that the recovery will stall altogether. As a result, we lowered our growth forecast for the second quarter after the weaker April data, and now lower it again following the May data.
Specifically, we now expect sequential quarter-on-quarter growth to slow to 0.3% from 2.2% in the first quarter. This lowers our full-year growth forecast for 2023 to 5.2% from previously 5.6%. Our full-year growth forecast for 2024 remains unchanged at 4.5%.
Further stimulus needed by Chinese policymakers
In response to the emerging growth risks, the People’s Bank of China last week cut several policy rates by 10bps. A similar fate was met by the bank's loan prime rates on Tuesday, with a cut to one-year loan prime rate by 10bps to 3.55%, while the five-year rate was also cut by 10bps to 4.2%. The rate cuts signal policymakers’ concerns about the slowing growth momentum and are a sign that they intend to support growth and reduce downside risks to growth.
However, the immediate economic impact of last week's rate cuts and this week's cut to the bank's loan prime rates is minimal and unlikely to reverse the subdued housing demand. We believe that more support measures are likely to follow in the face of the weakening growth momentum, but in a targeted manner rather than in the form of a large-scale stimulus package.
Policymakers are concerned about structural challenges related to excessive debt and overinvestment and want to promote quality growth. Therefore, we believe it is unlikely that they will resort to the large-scale stimulus playbook they used in previous downturns to boost growth across the board.
Japan provides a strong alternative for investors
China’s growth path can be felt around the world, in commodity markets, in emerging markets, and still quite markedly in Europe as well. So until any sizeable growth initiative is announced for China, we will continue to focus elsewhere for the time being.
In addition to Europe, where we continue to focus our stock-picking, the Japanese market is also showing up as a strong alternative to China for investors.
One of the main arguments for the increasing participation of foreign investors in the Japanese market is the weak macro data from China, while Japan has gained importance as an alternative for investment in the eastern part of the world. However, compared to 2012, when ‘Abenomics’ [the monetary-easing economic policies pursued by Japan under Prime Minister Shinzo Abe] was first introduced, the volume of foreign purchases in the market remains low.
Shareholders benefiting from share buy-backs
Meanwhile, Japanese corporates have one of the highest proportions of cash sitting on their balance sheets, and the recent market reforms, which only started this year, have unleashed a flurry of share buy-back announcements by companies. May alone set a new monthly record for share buy-backs. As a result, more capital is flowing back to shareholders, which should encourage more investors to participate in the market.
The recent uptick of inflation should bode well for Japan because it has been in a long period of deflation. This translates into an easier environment for Japanese companies to raise their prices, leading to a higher margin outlook. Our current Neutral rating will be re-examined if corporate reforms continue beyond this knee-jerk reaction of share buy-backs and currency depreciation. In the meantime, we advocate a stock-picking stance with a preference for quality growth.