Global Economy & Markets, Weekly Roundup 19/02/24
Chinese equities began the year of the dragon on a positive note, following substantial underperformance in the past twelve months
US inflation exceeded expectations in January, with the core CPI index increasing by +0.4% month-over-month. On the other hand, activity data were weaker-than-anticipated (retail sales). All in all, data had slightly hawkish repercussions for monetary policy prospects, with the US Treasury 10-year yield up by +11 bps wow to 4.30% and the 10/2s curve bear flattening.
Global equity markets were broadly flat (MSCI ACWI: +0.3% | +3% YtD). Chinese stocks quoted in Hong Kong (China Enterprises Index) and the US (MSCI CN) have increased by +3.4% and +3.7% since they reopened on Wednesday 14th, while the onshore CSI300 benchmark rose by +1.2% on Monday 19th, the first trading day post the Lunar New Year holiday season (February 10th - February 17th).
Note that Chinese equities have underperformed by a wide margin in the past twelve months, as investors’ confidence is tempered (i) by strict trade restrictions imposed on China, mainly related to the AI and more broadly the high-tech industry, from the US, European Union and UK and (ii) the real estate sector fault lines (CSI300 Real Estate: -42% since February 2023).
The Chinese real estate sector’s challenges remain a key issue for investors’ confidence. The vast backlog of unfinished pre-sold projects, combined with a big part of property developers currently being in financial distress, suggest that the restoration of prospective homebuyers’ confidence -- a crucial factor for the sector’s recovery -- will be a lengthy and challenging process.
According to IMF’s estimates, real estate firms at liquidity risk (negative cash, adjusted for short-term debt and net accounts payable) account for close to c. 55% of the sector’s total assets. Furthermore, fundamental demand for new housing, based on net urban household formation trends and other housing stock replacement projections, is expected to decline by almost 50% over the next 10 years according to the IMF.
The portion of distressed property developers’ debt being held by foreign investors is manageable, suggesting that the risk of financial contagion outside China, is measured. Regarding the two prominent firms missing debt obligations in recent years, USD-denominated bonds stand at c. $22 bn versus total liabilities of c. $330 bn for Evergrande and at $2 bn versus c. $110 bn for Country Garden.
At the same time, domestic distress contagion in China’s financial system has been contained so far by supportive measures from Authorities, albeit mainly via loan forbearance. Thus, credit risks for institutions with lending exposure to the real estate sector remain. Recall that loans towards property developers and mortgage loans, represent 7% & 18%, respectively, of total bank loans. At the same time, households’ balance sheets remain strained by mortgage loans for pre-sold (and not finished) houses, weighing, inter alia, on consumer confidence.
With the property sector accounting for about 20% of China’s value-added, the needed adjustment is anticipated to represent an important risk to economic growth. According to the IMF, real GDP growth is expected to slow to +4.6% in 2024 and to +4.0% in 2025 from +5.2% in 2023 in view of the ongoing weakness in the property sector and subdued external demand. In an adverse scenario which entails a deeper and more prolonged contraction in the property sector, real GDP growth in 2024 & 2025 could be -1.0% and -0.8% lower, respectively, compared to the baseline.
US inflation exceeded expectations in January, with the core CPI index increasing by +0.4% month-over-month. On the other hand, activity data were weaker-than-anticipated (retail sales). All in all, data had slightly hawkish repercussions for monetary policy prospects, with the US Treasury 10-year yield up by +11 bps wow to 4.30% and the 10/2s curve bear flattening.
Global equity markets were broadly flat (MSCI ACWI: +0.3% | +3% YtD). Chinese stocks quoted in Hong Kong (China Enterprises Index) and the US (MSCI CN) have increased by +3.4% and +3.7% since they reopened on Wednesday 14th, while the onshore CSI300 benchmark rose by +1.2% on Monday 19th, the first trading day post the Lunar New Year holiday season (February 10th - February 17th).
Note that Chinese equities have underperformed by a wide margin in the past twelve months, as investors’ confidence is tempered (i) by strict trade restrictions imposed on China, mainly related to the AI and more broadly the high-tech industry, from the US, European Union and UK and (ii) the real estate sector fault lines (CSI300 Real Estate: -42% since February 2023).
The Chinese real estate sector’s challenges remain a key issue for investors’ confidence. The vast backlog of unfinished pre-sold projects, combined with a big part of property developers currently being in financial distress, suggest that the restoration of prospective homebuyers’ confidence -- a crucial factor for the sector’s recovery -- will be a lengthy and challenging process.
According to IMF’s estimates, real estate firms at liquidity risk (negative cash, adjusted for short-term debt and net accounts payable) account for close to c. 55% of the sector’s total assets. Furthermore, fundamental demand for new housing, based on net urban household formation trends and other housing stock replacement projections, is expected to decline by almost 50% over the next 10 years according to the IMF.
The portion of distressed property developers’ debt being held by foreign investors is manageable, suggesting that the risk of financial contagion outside China, is measured. Regarding the two prominent firms missing debt obligations in recent years, USD-denominated bonds stand at c. $22 bn versus total liabilities of c. $330 bn for Evergrande and at $2 bn versus c. $110 bn for Country Garden.
At the same time, domestic distress contagion in China’s financial system has been contained so far by supportive measures from Authorities, albeit mainly via loan forbearance. Thus, credit risks for institutions with lending exposure to the real estate sector remain. Recall that loans towards property developers and mortgage loans, represent 7% & 18%, respectively, of total bank loans. At the same time, households’ balance sheets remain strained by mortgage loans for pre-sold (and not finished) houses, weighing, inter alia, on consumer confidence.
With the property sector accounting for about 20% of China’s value-added, the needed adjustment is anticipated to represent an important risk to economic growth. According to the IMF, real GDP growth is expected to slow to +4.6% in 2024 and to +4.0% in 2025 from +5.2% in 2023 in view of the ongoing weakness in the property sector and subdued external demand. In an adverse scenario which entails a deeper and more prolonged contraction in the property sector, real GDP growth in 2024 & 2025 could be -1.0% and -0.8% lower, respectively, compared to the baseline.