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China: How bad is bad?


Concerns over the outlook for developing markets - led by China - have exacerbated in the past month. Harry Tan (Head of Research, Asia-Pacific) discusses whether this means short-term opportunities may appear.

To be sure, sharply falling commodity prices over the past year have already heightened worries over export growth, fiscal positions and corporate financial health of many oil exporting economies. Higher interbank and lending rates driven by the first Fed rate hike in December 2015, alongside rising risk aversion, have also raised worries over global capital flows (mainly into US dollar denominated assets) and global disinflationary pressure. China stands at the apex of this bearish sentiment at the moment. The two rounds of RMB devaluation, renewed concerns over record-high debt levels, botched attempts at implementing a circuit breaker for the stock market and generally soft real economic activities have contributed to the tailspin in global stock markets, with many now trading in bear territories.  

Has the cyclical and structural story regarding China changed suddenly for the worse this year? No. Was it a surprise that growth came in at 6.9% last year? No. Does the market expect growth to weaken sequentially in the coming years? Yes. TH Real Estate believes that the managed soft landing of the Chinese economy currently being witnessed is a result of intentional economic and policy decisions that have been taken since President Xi took office back in 2012. And it is not just because of the need to rebalance the economy. The current landscape reflects a real and positive structural shift in our view, as China has reached an inflexion point in its development cycle where many industries have matured, real wages have reached a tipping point and middle class consumers have reoriented their spending patterns. Chinese policymakers need to act sooner rather than later to underpin healthy long-term growth and they have started to do so through the latest 13th five-year economic plan. 

Consequently and not surprisingly, China’s growth will continue to weaken and stay volatile in the short term. Leveraged driven industrial investment that has widened the output gap, created substantial excess capacity and lowered the full employment rate of growth will need to be corrected and that will take time. So will promoting entrepreneurship and private sector driven resource allocation through the setting up of Free Trade Zones. Steps have already been taken to reverse the decline in the overall and working age population, by ending the one-child policy. Hukou reforms will also bolster the benefits of urbanisation, currently near 50%. Presently, investors need to take a step back away from the dizziness in the stock market and acknowledge that a healthier economic landscape will resurface in China in the medium term as ongoing structural reforms start to show results. China, which is the world’s second largest economy in PPP terms, will become the biggest and that will help to underpin longer-term opportunities in the real estate investment market. This may be the time to take a quick breather but keep your eyes firm on the ground if and when short-term opportunities open up.

This article is intended solely for the use of professionals and is not for general public distribution. Any assumptions made or opinions expressed are as of the dates specified or if none at the article date and may change as subsequent conditions vary. In particular, the article has been prepared by reference to current tax and legal considerations that may alter in the future. The article may contain "forward-looking" information or estimates that are not purely historical in nature. Such information may include, among other things, illustrative projections and forecasts. There is no guarantee that any projections or forecasts made will come to pass. International investing involves risks, including risks related to foreign currency, limited liquidity particularly where the underlying asset comprises real estate, less government regulation in some jurisdictions, and the possibility of substantial volatility due to adverse political, economic or other developments. Past performance is no guarantee of future performance. Nothing in this document is intended or should be construed as advice. The document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. TH Real Estate is a name under which Henderson Real Estate Asset Management Limited provides investment products and services.Issued by Henderson Real Estate Asset Management Limited (reg. no. 2137726), (incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3BN) which is authorised and regulated by the Financial Conduct Authority to provide investment products and services. Telephone calls may be recorded and monitored. COMP201600041

Harry Tan

Harry Tan

Head of Research, Asia Pacific

Harry's biography