Australian investors should brace for more challenges in China as Beijing fails to identify a substantial policy fix for its economy, which has stalled to three-decade lows and led to the country’s sharemarket plunging more than 40 per cent in three years.
That’s the view of investment managers and economists, who say purported plans to pump 2 trillion yuan into the country’s tanking sharemarket, and the central bank’s decision to the cut the amount of cash that banks must hold on reserve, will do little to reverse its ailing economy.
China is Australia’s largest trading partner, accounting for nearly a third of international trade, and the industries most exposed to Beijing’s economic woes are resources and commodities.
Omkar Joshi, chief investment officer at Opal Capital Management, said Australia was “intimately linked” to China’s economy, and any downturn had the impact to affect local businesses.
“The impact on the ASX will be primarily on resources companies such as BHP and Rio Tinto, which are a big part of our index,” Joshi said. “But even more broadly, share prices of lithium miners have already been under pressure and a lot of that has been because of a slowdown in electric vehicle demand in China.”
He said despite the risk to resources companies, the price of iron ore had remained resilient, with shares in Fortescue Metal Group, for example, up 30 per cent over the past year.
Perpetual head of investment strategy Matt Sherwood said despite the downturn in the property market, the resources sectors may be cushioned to some degree as China ploughs on with building infrastructure, and the country was unlikely to face a Minsky Moment – the onset of a market collapse brought on by the reckless speculative activity that defines an unsustainable bullish period.
“China has had falling prices in the national accounts sense for the last three quarters, and that last occurred 34 years ago. Debt and deflation is a really dangerous combination,” Sherwood said.
“[The stimulus packages] do nothing to address the debt, deflation, demographic stagnation problem that China still has. China’s growth is rapidly slowing, debt is extremely high relative to living standards, so if growth continues to slow, it’s going to cause more upward pressure on your debt dynamic and more downward pressure on your price dynamics.
“The only thing preventing a financial crisis if both trends continue in the wrong direction is China has a closed capital account – people can’t get their money out, so there’s no hyper-selling.”
China’s sharemarket slightly recovered this week after authorities made moves in hopes of bolstering financial markets and the economy. Bloomberg reported Chinese premier Li Qiang, one of President Xi Jinping’s closest allies, had asked authorities to unlock around 2 trillion yuan ($430 million) from offshore state accounts to buy shares.
A day later, China’s central bank said the reserve requirement would be cut by 0.5 per cent from 5 February – the deepest cut to the rate since December 2021 – to allow about 1 trillion yuan ($210 million) to be released in the form of new loans.
The benchmark CSI 300 index, which replicates the top 300 stocks traded on the Shanghai and the Shenzhen bourses, has fallen to five year-lows but rose 3 per cent on Thursday, while the Hang Seng China Enterprises Index, which tracks Chinese stocks traded in Hong Kong, was up 3 per cent after dropping to its lowest in nearly two decades.
Beijing’s attempts to put a floor underneath tumbling stockmarkets and shore up the economy, which grew 5.2 per cent in 2023, slightly more than the official target but far shakier than many analysts and investors had expected.
Matthew Haupt, lead portfolio manager at Wilson Asset Management, described the stimulus funds as “piecemeal”, but added his contacts in China were expecting the federal government to announce two further packages by June, including relieving local governments of their debt burden.
“The measures on the surface are good, but they’re really going to need to address the confidence of the property market in China and transfer some of the debt off the local government to give them the ability to spend on the provinces,” Haupt said.
“But from a stockmarket perspective, to see the Chinese stockmarket take off, you’d need to see global inflows and there needs to be confidence around government policies.”
He said businesses and investors had been taking their capital away from China, where the government meddled too much with private enterprise, and into countries such as India and Japan instead.
Deloitte Access Economics partners Stephen Smith and David Rumbens this week issued a note to clients, warning the outlook for 2024 was “fraught with risk”.
“China’s economic woes and growing opacity is another cause for concern,” they wrote. “A debt-burdened property sector remains at the heart of the country’s economic challenges. Any further spillover to the shadow banking system could catalyse a vicious debt-deflation cycle that weighs on the global economy and Australia.”
Smith told this masthead, given China’s position as the world’s second-largest economy, its financial woes had big implications for the globe.
Government policies and business-led initiatives since the COVID-19 pandemic to diversify the nation’s trading partners could cushion the blow of China’s gradually declining economy, Smith said.
“Diversification of trade and other free-trade agreements [are] being pursued through the learnings of the pandemic, about diversified supply chains, and being less reliant on individual trading partner countries, and businesses taking decisions themselves to look elsewhere with the economic challenges and rising wages in China compared to other countries,” he said.
The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.
Source: Thanks smh.com