China’s thriving bonds, plus hopes for investment reform, trade talks and stimulus should hearten investors in 2019
- Neal Kimberley says it is prudent to have both concerns and confidence regarding China’s economy in 2019, as reforms and trade negotiations continue and policy options can still lift prospects
Industrial profit growth in China contracted by 1.8 per cent year-on-year in November. A recent survey of chief financial officers (CFOs) operating in China showed a rapid decline in economic confidence. Yet, heading into the Year of the Pig, perhaps investors will be drawn to a more positive China investment narrative.
That’s not to deny there are problems. As Hong Kong-based analysts at Japan’s Nomura Bank pointed out on December 27, the minus 1.8 per cent reading for profit growth in China in November was a seventh consecutive monthly decline. The Japanese firm expects this downtrend “to extend into 2019 given weakening domestic demand, the continued credit down-cycle and an escalation in the China-US trade conflict”.
As for that CFO survey, unveiled by consultancy firm Deloitte on December 19, it showed 82 per cent of the 108 respondents were now less optimistic about economic prospects than had been the case six months earlier. Of those surveyed, 56 per cent said their firm had already been hit by trade tariffs, which could understandably have soured their mood.
But US bank Goldman Sachs, admittedly writing on December 21, had seen some grounds for optimism. “Chinese policymakers are making efforts to boost credit growth and fiscal activity, and the detente in the trade row between the US and China has (for now) provided some relief”, it wrote.
Since then, on December 27, Gao Feng, a spokesman at China’s Ministry of Commerce, stated that not only were Chinese and US trade negotiators in close communication during the Christmas period, “the two sides have indeed made specific arrangements for face-to-face consultations in January”.
In a spirit of conciliation, it became clear on Friday that China is now prepared to import US rice for the first time, while, from January 1, it has suspended additional tariffs on US-manufactured vehicles and automotive parts for three months.
Investors will also have noted that China’s new draft foreign investment law, the text of which was released on December 26, includes a ban on compulsory technology transfers from foreign companies and on Chinese government intervention in foreign companies’ normal business operations.
Though it should not be forgotten that final legislation can often differ from the draft version, such Beijing-initiated proposals should address some US trade concerns and, if enacted, should attract more foreign investment into China.
A more proactive fiscal policy may also be on the minds of Chinese policymakers for 2019, with Minister of Finance Liu Kun alluding to lower taxes at a conference last week.
In both instances, there is a commonality in that Beijing has home-grown policy options to deal with the challenges facing China’s economy.
Indeed, Stephen Li Jen, of London-based Eurizon SLJ Capital, writing on December 24, argued that much of the slowdown in China’s economy is itself attributable to Beijing’s structural economic reforms and that Beijing “always has the option of suspending reforms” if needed.
Jen’s view is that Beijing is deploying, unlike on previous occasions, piecemeal economic measures “rather than something big and bold”, with the primary emphasis on structural reforms followed by fiscal measures, with monetary policy bringing up the rear and the yuan’s exchange rate not even playing a role.
Sun Guofeng, head of the monetary policy department at thePeople’s Bank of China (PBOC), said last week that China’s “monetary policy is still prudent”, that there “will be no deluge of stimulus” and that policy adjustments will be targeted.
The PBOC’s unveiling on December 20 of a “targeted medium-term lending facility” to make credit more easily available, for small and medium-sized enterprises, is just one example of that approach.
There are arguably already some market opportunities in China that might resonate with investors who are drawn to the more positive narrative for the Chinese economy in 2019.
Eurizon SLJ Capital’s Jen has already noted that “Chinese bonds have been the best performing asset class in the world” in 2018. While past performance is no guarantee of future returns, Jen argues that, with the opening of China’s yuan-denominated bond market and “the Chinese bond market significantly under-represented in the world’s bond holdings”, capital inflows into such paper could total US$2 trillion over the next three to five years.
In truth, it’s possible to have concerns about the outlook for China’s economy in 2019 but also to have confidence that the challenges are manageable. The positive narrative may ultimately prove persuasive to investors, as their greatest fear will normally be the fear of missing out.
Neal Kimberley is a commentator on macroeconomics and financial markets