China’s economic woes overshadow a promising investment climate

Investor sentiment toward China has worsened after a difficult year for the economy and stock markets. But the painful economic transition is also creating real opportunities.

China is struggling to regain investor confidence after a particularly difficult year for the world’s second-largest economy. But the negative headlines obscure a more nuanced picture of an economy in transition that presents select opportunities for bond and equity markets.

Pessimism toward China was on full display in the stock market last year. The MSCI China A Index of land stocks fell 11.5% in USD terms in 2023, compared with a 23.8% rise in the MSCI World Index of global stocks.

China’s market struggled due to government efforts to unwind its debt-laden real estate sector and a renewed anti-corruption campaign targeting various sectors. During this period of economic transition, policymakers have been reluctant to provide significant support for growth, which can be seen as an attempt to move away from China’s leverage-dependent growth model. As a result, corporate profits have slumped and investor sentiment has deteriorated.

According to official data released in January, China’s real GDP grew by 5.2% in 2023. While this is a marked improvement from the 3.0% growth rate in 2022, it is still a far cry from pre-pandemic times, when annual growth averaged 7.4% in the decade to 2019. We believe there is a possibility of a change in policy by the US federal government in 2024. While reservations about lower interest rates could lead to improved sentiment towards Chinese assets, additional policies to stabilize the real estate market and support growth will be essential to boost confidence.

Look beyond financial distress

Real estate sales in China continued to decline in 2023, shrinking by 54% from the market peak in 2021. Furthermore, industries related to the housing market account for approximately one-third of GDP. That said, the sector’s underlying impact on GDP growth will likely moderate in the coming quarters, as it has been more than two years since the structural slowdown began in the economy.

Consistent bad news from the real estate sector casts a shadow over more resilient parts of the economy. In fact, despite the housing sector’s woes, the economy is growing by nearly 5%, so other industries are clearly growing faster. In fact, manufacturing and infrastructure have recorded modest but solid growth rates (screen). Industries driven by domestic consumption, such as automobile sales and retail sales, are also growing at a reasonable pace.