China’s recent fiscal revision, including the issuance of 1 trillion yuan ($136.7 billion) in sovereign bonds, has made investors rethink their outlook for the country at a time when investing in technology is no longer a guarantee for lucrative returns.
“There is an expectation for China to run a more expansionary fiscal policy for the next couple of years, not just a few months,” said Zhiwei Zhang, president and chief economist at Asia-based Pinpoint Asset Management, during a panel discussion at the Hong Kong Fintech Week 2023.
Zhang commented on what he and many of his economist peers viewed as a surprising yet positive move when China’s top parliament body announced on October 25 one of the biggest changes to the national budget in years.
The National People’s Congress approved a 1-trillion-yuan sovereign debt plan that will raise the budget deficit ratio to about 3.8% of gross domestic product (GDP) from a previously set 3%. This came along with a bill to allow local governments to front-load part of their 2024 bond quota, according to the official Xinhua News Agency.
It is “an important policy turning point when the government is rethinking their strategies,” said Zhang. “It really helped investor sentiment… making people rethink not just this year, but also their outlook for growth next year. In that sense, I’m more positive about the China macro market.”
This major shift from the country’s conservative fiscal stance earlier this year is aimed at boosting growth and confidence, as China’s property market crisis and lacklustre recovery from the pandemic still weigh on investor sentiment.
Growth continues with a stronger-than-expected Q3 GDP putting the world’s second-largest economy on track to meet Beijing’s target of about 5% this year. But there is no denying that the days are gone when the economy was thriving at a staggering near-10 or even higher percentage in the decades around 2000.
“We should be expecting a different type of growth coming from China – economic growth or market returns,” said Catherine Yeung, investment director at Fidelity International, who joined Zhang in the panel discussion.
“Making money in China like we used to, [i.e.,] buying tech names, is not going to be how you make your returns in China going forward,” said Yeung. “You need to be non-consensus driven. You need to understand the fundamentals as well as to take into consideration policy direction.”
An improvement in corporate governance across Asian markets including Japan and mainly state-owned enterprises (SOEs) in China is making these capital markets more attractive to foreign investors, said Yeung. She believes that Asia, particularly China, stands to benefit as many of the world’s sovereign wealth funds are diversifying away from US assets, which they have probably over-invested over the past years.
Property market bottoms out
Panellists were of the view that the worst had passed in China’s property market, after seeing it become a drag on the economy with property investment tumbling 9.1% in the January-to-September period from a year earlier.
“From an investment perspective, you’re going to see further consolidation. Private developers will potentially default. State-owned developers are taking up the projects,” said Yeung, adding that an ongoing evolution in China’s secondary property market will contribute to its recovery.
“From an on-the-ground point of view, I think you’ll see further measures to restore confidence, especially in top-tier cities, because property is the main part of wealth and the family balance sheet,” said Yeung. “I think we’ve probably seen the worst… But again, we still have an abundance of oversupply that we need to get through for years and years.”
Zhang, who expects trillions more yuan in government bonds to be issued down the road, considers the property market recovery a critical factor influencing the outlook for China’s macro economy. “Whether that recovery will happen next year or a year later is a question,” said Zhang.