China’s property sector challenges and the slowdown of the multi-year property boom have caused concerns in financial markets. However, these developments should be seen as the growing pains of the economy’s transition towards a consumption and technology-driven model. Despite the risks, there are opportunities for long-term investors in areas such as AI, big data, and other technologies.
The shift in China’s economy started after the 2008 global financial crisis and has been largely fueled by debt. Local government financing vehicles and developers have been major borrowers. As the property market has stalled, economic growth has also slowed, raising doubts about achieving the government’s growth targets.
In the short term, the challenges in the property sector are not expected to significantly impact the wider economy. Measures such as debt extensions and bond refinancing have supported local government finances. The government has also implemented stricter regulations on developers and infrastructure investments.
However, it is doubtful whether these measures will be enough to revive the property sector and boost economic growth. A lack of spending by consumers and businesses could lead to further deterioration in risk assets. As the growth momentum deteriorates and credit default risk increases, there may be a threshold at which Beijing will introduce more forceful stimulus measures, even if it means raising national debt levels.
These stimulus measures could include increased support for the property sector, proactive infrastructure investments, attracting foreign investment, pragmatic approaches to geopolitics, and accelerated policymaking. Under such a scenario, the economic outlook may improve.
In terms of investment opportunities, there are several factors to consider. In equities, stocks may perform well if positive news emerges, particularly in sectors that align with government policies such as technology, AI, and big data. Government bonds have become attractive to investors as an alternative to equities, and the yield on 10-year Chinese government bonds may go below recent levels. The long-term role of the renminbi is expected to remain under pressure, but gradual internationalization of the currency may be beneficial in the long run.
Despite the challenges in the property sector, investors should focus on the long-term prospects of the Chinese economy. There are potential opportunities for investment, and the outlook remains strong.
Sources: State Council, Wind, Barclays Research, AllianzGI Global Economics & Strategy. Data as of July 2023, Wind, Allianz Global Investors, as of 31 August 2023.
Greg Hirt is the Global Chief Investment Officer for Multi Asset at Allianz Global Investors.