What’s the Buzz -China
China has been in the financial news lately as their shares have slumped over 10 percent this month in Hong Kong (the Hang Seng Index) and their currency has weakened versus the dollar. Given the importance of the Chinese economy and growing significance of their financial markets, we thought it would be helpful to provide a quick overview of the situation.
Many observers believed that China’s economy would be a global bright spot as it emerged from some of the world’s most restrictive COVID-19 controls. Instead, China’s economy has weakened and it has financial turbulence emanating from its property market and over-extended local governments and “shadow” financial system.
In a world of sub three percent growth, China’s target growth rate of five percent was compelling. The estimated growth of their economy for 2023 has, however, slid to closer to three percent due to weaker consumer spending and a troubled property market. This is important to investors because the IMF has estimated that China is expected to contribute over 20 percent to global growth (the U.S. is expected to contribute a little over 11 percent). Any slowdown in China will, therefore, have a significant impact on global growth. If you add to this the fact that a slowdown in China will have an impact on commodity producing countries (such as Australia and Brazil), you begin to understand the global implications.
Within China, property values and development have been a source of problems. In 2020, the government decided to crack down on property speculation and development. After restricting private sales for years, China created a national housing market which drove land values (and the debt used to develop property) significantly higher. When the government cracked down, this led to a cash flow crisis for developers and ultimately resulted in the collapse of Evergrande Group and is currently fueling the distress of Country Garden Holdings, which is even larger than Evergrande.
As a result of these financial strains, the Mainland exchanges this week asked some investment funds to avoid net selling equities (selling more than they buy). Officials requested state-owned banks to escalate intervention to support the yuan, while also encouraging companies listed on the tech-heavy Star Board to buy back shares. The securities regulator said late Friday it will slash handling fees in stock transactions and study extending trading hours for equities and bonds.
The bottom line for investors is that a slowing China, when coupled with a slowing United States, can change the trajectory of the financial markets (lower) and impact portfolio returns. The most likely affected markets are equity markets, especially exposures to Asia and commodity exporting countries.
The views stated in this blog are not necessarily the opinion of Cetera Advisors LLC. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.