China’s tail risks after the mass flight of foreign investors

It is no secret that China is not in its best economic moment. Exports are suffering a constant decline: falling for six consecutive months, with the latest data from October showing a decline of 6.4%. There are reasons for concern in the short term, according to experts, but also for optimism if the long-range lights are activated. Of course, knowing that the current photograph is quite dark.

The horror is such that, compared to the data of recent months from the Asian giant, foreign direct investments in are at historic lows. The majority do not even want to see China in their portfolios with this complicated spiral that has developed. “Not even in the late 90s had such a negative image been observed with the country… There are many headwinds that still make investors structurally not want to be in the region on average,” Deutsche Bank analyzes in a recent report.

The situation is difficult for investment. The country is going through an atrocious real estate crisis that is perfectly reflected by the new housing data. The latest data from November show that the sale of newly built properties has contracted by 20.3% in annualized terms, which ends up infecting the financial system, just as happened in Europe and the United States with the real estate crisis of 2008.

“This generates disaffection on the part of the institutional investor, who always looks for potential, but also the lowest possible volatility when deciding to bet long-term on a region,” says Morgan Stanley in its latest forecast report for emerging markets. “In the long term there will be potential, but there are still many noises that must be overcome,” adds the banking entity.

Domestically, the government is stepping up easing measures in the housing market, including Shenzhen reducing the down payment from 80% to 40% for second-home buyers and regulators urging banks to increase lending. . to real estate developers. “Further easing measures are needed to reduce left tail risks,” says Goldman Sachs in a recent report.

Shortly after Chinese President Xi Jinping’s visit to San Francisco for the APEC meeting earlier this month, the Chinese government announced several measures signaling its desire to increase economic ties with the rest of the world, with the intention to further open service sectors to foreign investment and the decision to allow visa-free entry into China to visitors from six countries. The administration is aware that they have to take a turn in the situation.

Not very optimistic data

The rest of the Chinese figures do not point to immediate optimism either. There is a clear imbalance between supply and demand. China’s headline CPI inflation turned negative again in October (-0.2% year-on-year), after briefly falling below zero in July (-0.3% year-on-year). Demand in the economy.

“While we expect policymakers to step up easing and project real GDP growth of 4.8% next year, we expect headline inflation to rise to just 1.3% in 2024, well below the government’s target. (actually a ceiling) of 3%,” predict Goldman Sachs experts.

In addition, the situation of the currency market must be taken into account. After the yuan held against the dollar around 7.30 for the past three months, the Chinese currency has now quickly fallen below 7.15 due to the weakness of the greenback.

“What is interesting is that despite this rapid strengthening, the People’s Bank of China continues to maintain its daily yuan peg with a stronger guidance in recent days, which for us is a clear indication that policymakers are focused . in reducing depreciation expectations and managing capital outflow pressures, especially as confidence remains fragile nationally and the real estate market struggles to find a bottom,” comments Goldman Sachs.

On the other hand, so far, industrial data in China points to a mixed outlook at the end of the year. While the emerging industries PMI index (EPMI) rose after seasonal adjustment, steel production would suggest lower manufacturing activity. “In net terms, we expect this month’s manufacturing PMIs to continue to be weak and in a contractionary zone,” the US bank concludes.