China A: Position For The Recoveries

The challenges faced by China’s economy in the last 12 months are well documented. The China A-share market is poised to benefit from the unfolding recoveries in China’s economy, property sector, and earnings. The market’s tilt towards manufacturing-oriented companies gives investors an opportunity to take part in the multi-year transformation of China’s manufacturing sector, at undemanding valuations.

Michelle Qi, Head of Equities, Eastspring China, discusses the opportunities in China A equities, the recovering Chinese economy, outlook for China’s property market, and the impact of China’s zero-COVID policy on the Chinese economy moving forward.

  • Heading into the second half of the year, Eastspring believes that there is a compelling case for China A equities. Contained inflation is likely to keep financing costs low, a sharp contrast to the rate hikes taking place in many other economies. Meanwhile, China continues to enjoy a robust current account surplus, a rarity within the Emerging Markets amid rising inflation and commodity prices. We think that negative earnings revisions in China have troughed, with earnings growth forecasts having fallen by 28% from their most recent peak. As such, we believe that there is scope for China’s earnings to surprise from here.
  • Michelle believes that the economy troughed in the second quarter of the year, helped by a number of policy measures that were announced in late May. These included tax rebates (140 billion yuan), deferral of corporates’ social security contributions (320 billion yuan), and a cut in the purchase taxes on passenger cars and other goods (60 billion yuan). We expect policies to further support infrastructure investments, as well as more subsidies for larger ticket consumer products such as cars, home appliances, and electronics. That said, the strength of China’s recovery would largely depend on the property sector and China’s zero-COVID policy.
  • China’s mortgage boycott is estimated to account for about 3% of China’s home mortgage loan book for China’s 14 largest banks. In 1H22, land sales declined by 31.4% from the previous year. Our estimates suggest that a 5% deceleration in real estate investment would lower China’s GDP growth by 0.6-0.7%. Our baseline assumption is that the housing market bottoms out in 3Q22 and will be on course for a more meaningful recovery in 4Q22 or 1Q23.
  • While China is maintaining its zero-COVID policy, the recent modest easing of quarantine requirements and travel restrictions in China, as well as the lower frequency of testing suggest that China would adjust its response according to how the COVID situation evolves. While renewed restrictions cannot be ruled out if the number of COVID-19 infections rises, she believes that China should be able to avoid the level of disruptions seen in April/May due to more proactive monitoring of potential outbreaks.
  • Eastspring believes that the China A-share market is poised to benefit from the recoveries in the Chinese economy, property market, and earnings. There are investment opportunities in companies within the Electric Vehicle (EV) and battery supply chains, as well as those involved in the production of solar panels, consumer electronics, semiconductors, and innovative drugs. In addition, the China A-share market tends to march to its own beat – domestic policies matter more and hence it may be less affected by the global tightening cycle.
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