China's cautious recovery

By Dr. Mirko Wormuth, Co-Portfolio Manager of DJE - Asien

China's stock market recently recorded a significant upswing. What are the reasons for this, how are the initial measures in the ailing property market taking effect and what role does the trend towards more travel, sport and outdoor activities play?

The Chinese equity market recently recorded its strongest monthly outperformance since the end of 2022, especially compared to other markets in Asia and the emerging markets. In April, the MSCI China Index outperformed the MSCI Emerging Markets and the MSCI AC Asia ex-Japan by 6.2 per cent and 5.3 per cent respectively. The Shanghai Composite Index also rose and is now trading almost 19 per cent above its low from 5th February. At the same time, the Hong Kong market continued its impressive run with a gain of 16 per cent.*

Was ist für den jüngsten Aufschwung verantwortlich? Die Gründe lassen sich einerseits in den niedrigen Bewertungen (nach langer Durststrecke) verorten, anderseits auch im Politischen. Fangen wir mit den politischen Entwicklungen an. 

The Politburo has met

In April, an important Politburo meeting was held that raised new hopes for a turnaround, especially with regard to the critical residential property market in China. It was announced that it was essential to "take measures to reduce the housing stock and improve the quality of new housing in a coordinated manner." More importantly, the government announced that the long-delayed Third Plenum of the 20th Central Committee of the Communist Party (CP) will finally take place in July.

What is the "Third Plenum"?

Every five years, the CP holds a National Congress to, among other things, form a new Central Committee, which serves as the highest authority of the party when the Congress is not in session. During its five-year term, the Central Committee meets in seven plenums, of which the Third Plenum in particular attracts considerable attention as it often introduces decisive changes to economic policy. One of the most important in China's recent history was the Third Plenum in December 1978, when a decisive era of reform and economic transformation was heralded in China under Deng Xiaoping. This meeting marked the beginning of a new policy direction that allowed foreign companies to invest in China in the first place and laid the foundation for China's rise to become the world's second largest economy.

After the Third Plenum in 2013 - the first under Xi Jinping's leadership - the CSI 300 Index, which tracks the performance of the two largest stock exchanges in mainland China, Shanghai and Shenzhen, rose by more than 120 per cent within 18 months. After the Third Plenum in February 2018, the effect was not quite as strong, but the CSI 300 still rose by more than 50 per cent in the following three years.

Movement on the property market

What is happening on the Chinese property market, which has been under severe pressure in recent months? First of all, it remained at a very low level in April: China's one hundred leading real estate companies achieved a turnover of just 312 billion renminbi (RMB). This is a drop of 45 per cent compared to the same month last year - and also 13 per cent compared to the previous month. At the same time, 35 Chinese cities have already eased their restrictions on property purchases, while a further 24 cities have cancelled them completely. This is because the most important measure currently being taken to resolve the situation is the so-called "white lists". Here, liquid funds are made available to property developers via state banks under certain conditions in order to complete unfinished residential construction projects that have already been paid for by customers. These unfinished projects had severely affected the confidence of buyers. According to the Ministry of Housing and Urban-Rural Development, almost 2,000 projects had already been added to the list by the end of March. These projects received loan commitments from banks of RMB 469 billion in total. This corresponds to around 65 billion US dollars.

This area is so relevant because real estate accounts for between 50 and 70 per cent of Chinese households' net assets and is therefore a key factor in consumers' propensity to spend. Despite a savings rate that has now reached 115 per cent of GDP, households are still reluctant to spend. Growth in real retail sales in China continues to be much more moderate after the pandemic than in the 15 years before the crisis.

The new "nine-point guideline" of the Council of State

It is therefore in the interests of the state to stimulate consumers' willingness to spend and to make the money traditionally invested in property accessible to the capital market. In the latest publication by the State Council in mid-April, far-reaching reform plans for the stock market were set out, which provide for a series of measures as part of a 'nine-point guideline'. These include the promotion of higher dividend payouts, the expansion of investor protection, stricter review mechanisms for IPOs and the revision of delisting standards. These measures must now be implemented by the new head of the regulatory authority.

Total shareholder return policy in China

The first steps are encouraging. For example, companies on the Chinese A-share market, where shares can only be traded in RMB, bought back shares worth RMB 73.2 billion in the first four months of this year. This is a significant increase compared to the RMB 21.4 billion in the same period of the previous year 2023. Buybacks worth more than USD 10 billion (for B shares) were already announced on the Hong Kong stock exchange in the first quarter. To illustrate the dimensions: The total cash volume of the companies in the MSCI China corresponds to around half the market capitalisation of the MSCI Asia ex-Japan Index or 12 per cent of the MSCI AC World (excl. financials).

Tencent and Alibaba

Let's take a look at two well-known companies: The trading platform Alibaba has significantly increased the pace of share buybacks, according to its own information. Between January and March 2024, the company acquired 524 million shares worth USD 4.8 billion. This represents a significant increase compared to the average of USD 2.6 billion over the last three quarters. The buy-backs reduced the total number of shares by around 5 per cent. If the buybacks of the last twelve months and the dividends are taken into account, this results in a return of 8 per cent.

In addition, the internet group Tencent has increased its dividend to 3.4 Hong Kong dollars (HKD) (HKD 2.4 in 2022) and intends to buy back shares worth at least HKD 100 billion in 2024 (HKD 49 billion in 2023). This results in a yield of five per cent.

China market valuation

Despite the recent market rally, the MSCI China is currently still trading 54 % below its February 2021 peak and is valued at 1.2 times book value - which was 5.3 times in October 2007. The estimated price-to-earnings ratio of the MSCI China is currently 9.9x, which represents a 20 % discount compared to the MSCI Emerging Markets. This valuation is at the lower end of the spectrum that has been observed since 2017. So there is still plenty of room for improvement. However, it should not be forgotten that the current macroeconomic environment is much more deflationary than in most previous periods.

Trend towards more travelling, sport and outdoor activities

Are Chinese consumers no longer spending any money at all? Yes, travelling, sports and entertainment have seen a sustained upswing since the end of the pandemic. Cycling, hiking and camping in particular have become top favorites. According to data from Xiaohongshu, a leading social media platform, posts on "cycling" and "hiking" increased fourfold and threefold respectively between January and October last year. March 2024 showed above-average growth in retail sales for sporting and leisure goods, up 19 per cent year-on-year, compared to a moderate 3.1 per cent increase in overall retail sales. Sporting goods manufacturers were a clear beneficiary of this trend.

The desire to travel has increased even more. The most recent Chinese holidays, such as Chinese New Year and the recent Golden Week on 1 May, have already seen travel figures exceed those of 2019. The international travel segment is still lagging somewhat behind, as not all flight connections have been re-established. But even that will only be a matter of time. A large Chinese online travel provider is best positioned to benefit from these developments. The company is also interesting because it can play on the other major investor theme in China with its app, which is becoming increasingly popular in Southeast Asia in particular: Going global.

In short, the Chinese consumer is alive and kicking. They are just spending their money in different places and perhaps generally more prudently than before. Now it is up to investors to find out exactly what these trends are and to invest in them.

*Source: Bloomberg. All index figures based on local currency. As at 30/04/2024.

 

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