Chart of the Week – Chinatown

Welcome to this week’s Chart of the Week.

Chinese equities surged after the country’s central bank fired its ‘monetary bazooka’ of economic stimulus measures last month. The MSCI China Index was up more than 21%* in September as investors reacted to the aggressive package, which includes interest rate cuts, reductions in reserves banks are required to hold and direct stock market support. But last week, reality hit – and it hit hard, with the MSCI China Index down nearly 7%* over the course of the week.

The People’s Bank of China’s package, labelled ‘eye-popping’ by Bloomberg, includes measures to prop up the housing sector and stabilise the stock market. But China’s problem isn’t just a lack of liquidity – it’s a classic balance sheet recession. Decades of overinvestment and the bursting of the housing bubble have left consumers and banks on shaky ground. China has a glut of empty and unfinished properties – stranded assets that are dragging the economy down.

The question now is whether the stimulus package will be enough to reignite growth. Some argue the measures are akin to China’s 2008 playbook, a broad and unprecedented raft of measures that could spark a recovery. Others are sceptical, likening it to trying to push a rope.

While the Chinese equity market looks cheap, fundamental challenges remain. As the charts below show, plunging property prices have been mirrored by a sharp fall in consumer confidence.

This negative turn in consumer sentiment isn’t surprising given that most people’s wealth in China is associated with their property. Given the collapse in the property market, they are most certainly feeling less well off. China recently celebrated Golden Week, which is when people visit family and generally spend a bit. However, this year we didn’t see any indication of an increase in the appetite of consumers to part with their money. Spending per domestic trip during the seven-day public holiday, which ended last Monday, was about 2% lower than pre-pandemic levels, according to analysis by Goldman Sachs.

No sign yet then that the stimulus measures have reinvigorated confidence. However, we do think the recent announcement draws a line under things. As an investment team, we’re looking closely at China and Asia and will be closely watching the next steps taken by Beijing’s policymakers.

Key takeaway: You’re never confident when you take your first step, it’s the next couple of steps that are worth watching.

Have a great week,

Nathan Sweeney, Chief Investment Officer of Multi-Asset

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