A look at the Chinese economy today reveals some dilemmas, particularly for investors trying to gauge future growth. If the government sticks to an infrastructure investment plan to boost growth, the debt problems will worsen. If you stimulate the flagging real estate market, the real estate bubble will remain unresolved. Cut interest rates – while the US is raising rates – and the pressure is on to prevent outflows into the stronger US dollar. With policymakers left with little room for maneuver and geopolitics uncertain, investors could turn to defensive stocks in healthcare and insurance. That’s what consumers wanted to buy anyway with the money they had when China ended its Covid measures late last year. Official statements over the last two years show that the world leaders still have a lot of convincing to do about making more money available to consumers on a large scale. Exports fall due to global weakness, which China cannot control. Today’s problem that China has recognized is a lack of trust. This could lead to the economy falling into a vicious circle. And it might as well bounce back in a virtuous cycle. “When the economy is bad, confidence is weak. When confidence is low, spending is low,” said Michael Pettis, finance professor at Peking University. When “spending is low, the economy is doing badly.” The result of the ongoing uncertainty is that companies in China are withdrawing their hiring and future investments. They’re also reducing their debt — and paying more attention to cash flow, according to S&P Global Ratings. “If all companies do this, the growth will not be as fast as [but] “The quality will be better,” Chang Li, director of corporate ratings at S&P, said in Mandarin, translated by CNBC. “The low growth rate is a long-term trend going forward.” He reckons government stimulus will only support certain industries, such as high-tech, manufacturing and renewable energy. This electric car industry — of vehicles, battery charging stations and power grids — is the only area where the central Chinese government has announced the most concrete stimulus measures so far, most notably in the form of expanding tax breaks. As for other details, important government meetings on the horizon could make them clearer, at least domestically. A Politburo meeting with top officials is planned for late July. Regardless, the twice-a-decade Intergovernmental Conference on Finance Works could be taking place soon – it has been long delayed since it was expected last year. A so-called “third plenum” of top politicians is expected to set a multi-year economic agenda in the fall. How to Play It’s also worth diving into sectors and picking those industries that can grow despite the weak economy. The nature of China’s economic recovery from the Covid crisis in recent months has unique characteristics that cannot be easily summed up, Andrew Tilton and a team at Goldman Sachs pointed out back in late May. Covid hit the services sector hardest, and its recovery is only benefiting specific companies – and not a network of supply chain firms, analysts said. They also estimate that Chinese companies listed on the mainland and Hong Kong equity markets would post 8% slower revenue growth in a consumer-led recovery than in a similarly sized investment-driven recovery. That means the stock winners of China’s recovery are likely to remain hidden under broader market action. A month after Goldman’s assessment, China’s economic development remains unchanged. Policymakers have merely cut some interest rates and announced support for electric cars. Citi lowered its full-year GDP forecast in June, along with other investment banks. “Risks are mounting that vulnerabilities in the economy will become more painful,” Citi analysts said in a statement Tuesday. “If weak confidence solidifies that much, it could become self-perpetuating and derail the economic recovery.” In this environment, Citi equity analysts favor healthcare and insurance stocks, saying they are less affected by slower economic growth or even supported. Their favorites for the second half are insurance giant AIA with a target price of HK$106 and Shenzhen-based medical device company Mindray with a price target of 450 yuan. That’s about 34% and 50% up, respectively, from where shares ended the week on Friday. AIA is listed in Hong Kong while Mindray is listed in Shenzhen. — CNBC’s Michael Bloom contributed to this report.
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