The Chinese stock market recently recorded its strongest monthly outperformance since late 2022, especially compared to other markets in Asia and emerging markets. What is this increase due to? He explains it Mirko Wormuth, Equity analyst in Research & Portfolio Management underlining that “on the one hand, the reasons are to be found in the low ratingsi, on the other nei political factors”.
Chinese market valuations still low
Despite the recent market rally, the MSCI China – explains the expert – it still is trading below the February 2021 peakand is valued at 1.2 times book value – it was 5.3 times in October 2007. MSCI China's estimated price-to-earnings ratio is currently at 9.9x, which represents a 20% discount to MSCI Emerging Markets. This rating is at the lower end of the spectrum observed since 2017, so there is still a lot of room for improvement. However, it should not be forgotten that thecurrent context macroeconomic is much more deflationary than in most previous periods.
Focus on the real estate market and boost to consumption
What is happening to the Chinese real estate market, which has been subjected to strong shocks in recent months pressures? First of all – he continues Wormuth – last April, the 100 leading real estate companies in China recorded a turnover of just 312 billion renminbi, down by 45% rcompared to the same month of 2023 – and even 13% compared to the previous month. At the same time, 35 Chinese cities already have reduced restrictions on property purchases, while 24 other cities have canceled them. The most important measure currently adopted to resolve the situation is the so-called “white list”, which provides that liquid funds are made available to real estate developers via state banks to complete unfinished residential construction projects but already paid for by customers. According to the Ministry of Housing and Urban-Rural Development, by the end of March almost 2,000 projects had already been added to the white list, projects that received loan commitments from banks totaling 469 billion RMB – that is, about 65 billion US dollars.
Real estate represents between 50 and 70% of the net assets of Chinese families, and it is therefore a key factor in consumers' propensity to spend. Despite a savings rate that has reached 115% of GDP, families are still reluctant to spend.
It is therefore in the state's interest “stimulate consumers' propensity to spend and make money traditionally invested in real estate accessible to the capital market. The State Council has in fact defined reform plans for the stock market, which include the promotion of an increase in dividends, the expansion of investor protection, stricter review mechanisms for IPO and the review of delisting standards. It should however be remembered that these measures must be implemented by the new head of the regulator.”
Consumption improves
Chinese consumers they don't spend anything anymore? In fact, “travel, sports and entertainment have seen sustained growth since the end of the pandemic. In particular, cycling, hiking and camping have become favorite pastimes. According to data from Xiaohongshu, a leading social media platform, posts about “cycling” and “hiking” increased four times and three times respectively between January and October last year. The month of March 2024 recorded above-average growth retail sales of sporting and leisure items, up 19% from the previous year, compared to a moderate 3.1% increase in overall retail sales. THE sporting goods manufacturers have been an obvious beneficiary of this trend.”
The desire to travel “has increased even more. The latest Chinese holidays, including the Chinese New Year and the recent Golden Week in May, have already recorded higher travel figures than 2019. The international travel segment is still subdued, as not all air connections have been re-established, but it's only a matter of time. A large Chinese online travel provider is best positioned to benefit from these developments. The company is also interesting because with its app it can play on the other main theme of investors in China, which is becoming increasingly popular especially in South-East Asia: going global”.
In short – concludes the expert – “the Chinese consumer is alive and well – he's just spending his money in different places and perhaps more prudently than in the past. Now it's up to investors to find out exactly what these trends are and invest in them.”
