China’s economy was expected to bounce back after COVID-19 restrictions were lifted. Instead, it has struggled to gain economic momentum. Greg Bonnell speaks with Haining Zha, Portfolio Manager at TD Asset Management, about new stimulus efforts by Beijing and the challenges ahead.
Will China’s efforts to boost its struggling economy pay off?
* The lifting of pandemic restrictions was expected to provide a big boost to China's economy, but amid tepid growth, investors are increasingly hoping for Beijing to step in with some stimulus. Joining us now to discuss how things may play out is Haining Zha, portfolio manager with TD Asset Management. Haining, it's always great to have you back on the show. * It's great to be here. * All right, so we're talking stimulus, let's talk with China's central bank. As I understand, there have been some moves recently from the PBOC that could be read as a bit of stimulus. What are they up to? * Right, so basically, a few days ago, PBOC cut its open market operational repo rate by 10 basis points. And later on, the medium-term lending facility rate, which is the rate central bank lend to the commercial banking system, is also cut by a similar 10 basis points. And it's highly likely that in the coming days, the loan prime rate, which is the rate that goes into the mortgage and corporate loans, will also be cut by similar magnitude across the tenor. * What is the PBOC seeing right now in the economy, that they feel they need to make these moves? * Right. So the answer is very simple-- the data point coming from the economy, starting from April, has been appalling. For example, if you look at retail sales, on a year-over-year basis, it looks like the headline number is kind of OK, but if you look at the month-over-month basis, that the reason why you do that, because in April last year, Shanghai had a lockdown. So all of the numbers are suffered, that the low base bias. * So if you look at on a month-over-month basis, out of all of the categories-- there are about 16, 17 subcategories out there-- only one category on a month-over-month is slightly positive, like up 1%, 2%. * All of the other categories are down a lot. For example, cosmetics, down 30%, telecom equipment down 20%. So things are not looking good. * And this is not the only weak data point. For example, the manufacturing PMI has been down below 50 for two months in a row. And also, on the real estate side, at the start of the year, there was a brief-- very brief-- revival. But it came back down. * For example, the real estate investment, down 7% year to date, and just in May, the floor space sold was down 1%. So things are not looking good. That's why it's very important for central bank to step in and stop this downtrend. * What is happening with the economy? I mean, because at the beginning of the year you thought, OK, you lift the COVID restrictions. Here, you have people who are waiting, as we did when we lifted our COVID restrictions, to get back out there and to spend money, whether it's through travel, whether it's on restaurants, or goods, or what is the nature of what's happening here? Why are things stalling in? * I think the key is the job market are not coming back. So I know the people have some excess savings, but they are for the rainy days. So if they are not getting their job back, they are not getting their income back, then, they will be reluctant to spend. So that will remain an overhang for the Chinese economy. * OK, so let's talk about what's been done already. As you lay it out, what the PBOC has been up to, what they may be up to. What about on the monetary policy side? What about the fiscal side? I mean, there's been some rumblings-- I don't know if the rumblings are just wishful thinking from some investors-- that you may get some action from Beijing on that front. What would they have in store? * Right, it's very likely that the monetary policy easing will be complemented by some kind of fiscal measures. So there are talk in the market, for example, some of the real estate policy, for example, the purchase restriction could be removed. And also there is also talk that the government is going to do something to stimulate automobile consumption. * And moreover, there could be a special central government bond issuance, about 1 trillion RMB, used to fund the fiscal stimulus and expansion. * Would that be enough? I mean, if we're just thinking about what's in the realm of possibility, would they be pulling the right levers to turn things around for the economy? * Right, for example, take monetary policy, for example, 10 basis points is hardly enough. But I guess, for example, when the Federal Reserve cut, it always cut in 25 basis points clip. So given the amount of pressure the Chinese economy suffered, I think they definitely need to do more. * But you almost never see PBOC cut in big sizes. So they would like to take gradualism approach-- they test the water, see what's the reaction and sentiment, and then they collect that signal, and observe the market. And then, we'll try to do more, if it's not enough. * And on the other side, I think some of the fiscal stimulus measure might not work very well this time around. For example, the removal of purchasing restrictions. For example, I mentioned that the people are not getting their job and their income back-- think about in these circumstances, how are they going to all of a sudden make a big item purchase? Such as house? * So by removing that purchase restriction, you will not receive a lot of true stimulus in economy. * Exactly. That's a good point. If you don't have a job, you don't feel very good about making big purchases. * What about the markets in China? I mean, on a valuation basis, when you take all of this into account, how are the markets looking? * Right, the valuation is actually one advantage that investor can have right now, because it is going back to Q4 of last year valuation, very low, just above 10. But low valuation is not enough for investors to get in the market at a good timing. So the typical winning pattern is not only the valuation need to be low, but also the investors are deeply suspicious, and also, you have some positive stimulus, or catalyst on the horizon. * So before central bank doing the move, you have very low valuation, very down sentiment. But you don't have the third one. But now, it makes things look more interesting. * So definitely something to take a look at. Before we leave this conversation, I wanted to talk about what's happening in the headlines right now-- you have the US Secretary of State, Anthony Blinken, in China, meeting with President Xi. How should we read this kind of situation? Obviously, it's good the two sides are having a conversation. * Right, it is always good to talk, and keep the communication channel open. And I noticed that Blinken reiterated the One China policy, and also the three communique-- which is a positive for China. China would view it as a positive signal. * So in the long run, it probably will not change the overall geopolitical setup, but in the short term, it's definitely a positive. * I mean, some people think it lays the groundwork for perhaps President Xi and President Biden to meet at some point. Will that take relations a little further along, or at least keep things from getting worse? * Hopefully, that's the case. But we still need to carefully observe what's going to happen between now and then.