Data shows China’s Q3 2023 GDP at +4.9% y-o-y (0.5% ahead of market expectations), after a notable slowdown in Q2 due to weakness in the housing market and soft private sector sentiment. Chinese authorities have been supporting domestic demand by implementing moderate easing from mid-August by lowering the reserve requirement ratio and relaxing curbs on the property market to attain its annual GDP target of 5%. The policy support is expected to continue until the end of the year.
Leading investment banks (IBs) have upgraded China’s annual GDP growth rate (to 5.2-5.4%), although some macro improvements remain uncertain.
What’s Working
- The Q3 GDP result indicated a rebound in domestic consumption. Consumption, the most important driving factor of the Chinese ‘Troika’ (investment, consumption, and exports), contributed 83.2% to economic growth in the first three quarters, which accounted for 4.4% of GDP growth. During the quarters, goods and services consumption grew at 6.8% and 18.9% y-o-y, respectively. The recovery in consumption highlights the bright prospects of the Chinese economy and its ability to attract investments.
What’s Not Working
- High US Treasury yields have led to a refocusing of fund allocation; the Chinese A-share market is likely to have lost its attractiveness for global investors. With the Fed’s rate hikes and persistently high US Treasury yields, there has been a consistent foreign capital outflow from A-shares, as investors are opting to focus on the US rather than emerging markets and the impact is felt on the A-share China market as well. In the past 2 months (Sep & Oct 2023), net outflows from China’s stock markets totaled more than RMB 130 billion, exceeding historical extremes. As the Fed’s rate hike cycle is not yet over, the negative impact may continue in the coming days.
- In the short term, China will need further policy stimulus to boost investor confidence, as they harbor doubts about the sustainability of its recent macro data improvements, more so because a similar recovery in Q1 subsequently weakened in Q2. It is being estimated that the country’s policy stimulus so far (e.g., fiscal spending and property easing) has been conservative and below expectations. Although China’s housing sales and prices dropped sharply in Q2 after initial recovery, strong Q3 data may further reduce the urgency for more stimulus, despite China’s capacity for more allocation, given its relatively low government debt levels. (Government leverage ratio as of Oct: China ~50% vs developed countries’ average ~120%)
- In the long-term, China needs new growth areas to sustain investor confidence. Its economy has relied on manufacturing and real estate over the decade but is now facing challenges. The low-end manufacturing sector is losing competitiveness to Southeast Asia. Meanwhile, the real estate market is grappling with deleveraging and falling asset prices, which have reduced residential spending, affected the credit market, and posed uncertainties for investors. China’s central bank is taking measures to address these issues with government collaboration. To secure a soft landing for the economy, the country will need to explore new growth opportunities and break through the current obstacles to create more confidence in the market.
- The ongoing Israel-Palestine conflict has created external uncertainty as well as potential risks for China, which is Israel’s second-largest trading partner, particularly in energy supply. With the continuation of the conflict, commodity prices, especially international oil prices, could surge, affecting its production costs and potentially inhibiting growth. Additionally, the conflict may indirectly influence the pace of Fed rate hikes and contribute to a risk-off sentiment among foreign investors.
How Will the Situation Impact Research Operations?
IB research revenue can be grouped into two categories – commission / trading fee (still applicable in China) and revenue from selling reports or subscriptions.
Commission / trading fee: To get access to research reports, buy-side funds need to have a trading account with an IB. They pay a commission fee for each transaction they make through the bank and, in return, get unlimited access to research reports developed by their research department. The risk of lower-than-expected trading volume / investment demand (including for Chinese assets) can have a negative impact on IBs’ research operations.
Revenue from selling reports or subscriptions: International IBs provide research as a service through subscriptions to their publishing platforms, access to insights from industry experts, subject matter specialists, investment analysis and advice across various sectors. Other than taking advantage of high trade volume, research departments in bulge bracket IBs benefit from the depth and width of their coverage.
What’s Next for Research?
China’s better-than-expected growth in Q3 shows a recovery from the pandemic, while the rebound in consumption shows that the economy is likely to attract more investors. Based on its overall undervalued stock market, compared with other countries (current A-share valuation is lower than 1664 pts in 2008), the demand for investment in the Chinese market will likely recover in the coming quarters.
A higher demand for investment will potentially lead to a greater need for research, including 1) investment research due to increasing investor focus and 2) field surveys, expert calls, and on-ground proprietary research for better access to insights on China. The demand for more research on the Chinese stock market from IB analysts could create an opportunity for Evalueserve to ramp up its IB engagements with various Research (buy side and sell side) clientele.
Contributors
Annie Zhang
Senior Manager
Evan Chen
Analyst
