Amundi: China’s pivot-steering through turbulence to sustainability

22 januari 2024

The goal of Chinese policymakers is to manage the economic transition. This suggests deleveraging has become the new priority over the old growth-centric approach.

Since China embarked on economic reforms and opened up its markets in 1978, it has enjoyed a prolonged period of extraordinary growth. A discernible trend emerged in the early 2010s that the country’s growth has peaked and begun to moderate. The focus now turns to the endpoint for this trajectory, and the potential for China to maintain its ascent with a more sustainable growth rate.

This slowdown is structural in nature, propelled by a sharp correction in the housing sector since late 2021 that is still unfolding. In 2024, we expect housing prices in major cities to register faster declines, particularly as the supply of affordable homes increases.

The painful process of rebalancing away from an excessive reliance on real estate, compounded by the onset of local government debt restructuring, is expected to place downward pressure on China's growth over the next three to five years.

Nevertheless, it’s not all doom and gloom. The question is not whether growth will slow further, but if China can navigate towards a sustainable future. Aside from real estate, unrelenting debt growth and insufficient investments, are grounds for generating future sources of growth. Productivity lies at the centre of the new growth model, with a renewed focus on technology and the energy transition. However, Beijing needs to mitigate the transition pain and reinvigorate reforms.

From an investment standpoint, the shift toward a more sustainable growth model presents long-term opportunities in Chinese assets, but it also calls for increased selectivity in the short term to cope with the economic slowdown. 

• Equities: we maintain our long-term positive view as we see Chinese equity as a core component of a strategic asset allocation, but we are increasingly selective with a neutral bias short-term amid the weakening real estate sector, about which we are negative (particularly regarding developers). However, valuations are appealing and the longer-term risk-reward appears attractive (especially for the domestic market) even after taking into account another wave of downward earnings revision in 2024, as consensus earnings expectations are still too high. In terms of sector allocation, we favour quality stocks in resilient sectors and companies with the ability to gain market share and that operate in key technologies.  
• Bonds: we maintain a cautious view with regard to Chinese corporate bonds. The ongoing deleveraging effort will lead to widening credit differentiation. As for sovereign bonds, we believe that Chinese Government Bonds (CGB) offer diversification opportunities for global investors. Anticipating continuously accommodative monetary policy and a declining neutral rate, CGB yields will remain steadily low.
• Currency: the Fed pivot and PBoC’s monetary policy choice are the key determinants for the RMB outlook in 2024. We expect the currency to have a mild appreciation against the dollar amid the narrowing policy rate gap. Over a longer horizon, the RMB will be increasingly used as a settlement currency in trade. Further globalisation of the RMB will hinge on its financing and investment functions, where China’s financial liberalisation and global integration will play an essential role.