Stocks are betting on China’s economic future after its real estate problems pass
China is not headed for Japan-like stagnation because the government is behind the recent real estate collapse, Yao Yang, dean of an economics department at a top Chinese university, told reporters in late September. Not only does that mean the recent lull is temporary, but China’s high savings rate, artificial intelligence applications and renewable energy expertise also signal the country’s longer-term potential, he said. “I think we should compare China with Japan in the 1970s, because after the Tokyo Olympics in 1964, Japan entered a period of rapid economic growth… that lasted 30 years,” Yao said in Mandarin, translated by CNBC. He heads the National School of Development at Peking University. As bold as the claim sounds, Bernstein made the case in a September 29 note titled “The Long-View: ‘Japanizing’ China? – Not really” a similar view. Despite similarities to Japan in the 1990s – such as an aging population and low consumer confidence – China today has many differences, wrote Rupal Agarwal, director and Asia quantity strategist at Bernstein. For example, China’s urbanization rate in 2022 is 64%, the same as Japan’s in the 1960s, she said, pointing out that Japan’s urbanization rate was much higher at 77% in the 1990s. China is also a leader in innovation based on research and development spending relative to sales, the report said. “Although there are no easy and quick solutions to China’s economic challenges, we believe there are still sufficient levers to bring about a broad-based recovery,” she said, noting that this requires increased urbanization and support for the economy Central government in debt problems caused by local government. Easier said than done, especially because debt and urban development are tied to a struggling real estate sector that accounts for about a quarter of China’s economy. While Bernstein’s Agarwal didn’t name any stock picks in its Sept. 29 report, it did highlight some “buy”-rated Chinese stocks — high-growth names that still compare favorably to five-year valuations — in a separate report that month. Here are three of the stocks on the list that did not include price targets: BYD – Bernstein lists mainland China-traded stocks of the Chinese electric vehicle giant that is on track to become a global auto exporter. Shares are down about 7.5% year to date. Estun Automation – Listed on the Shezhen Stock Exchange, Estun sells robots and components for factory automation. The stock is up nearly 2% year to date, but is trading at about half of its record high reached in 2021. Meituan – the Hong Kong-listed Chinese food delivery giant has suffered a 38% decline this year along with the rest of the Hong Kong market. The company reported a 33% year-over-year increase in revenue in the second quarter and profited from a loss in the period. However, economic analysis and market forecasts remain in the realm of theory. After a summer of growing concerns about China’s growth prospects, Henry McVey, head of global macro at KKR, made another trip to the region. Compared to his visit earlier this year, this time people had a better understanding of real estate issues, he told me in an interview on Thursday. He added that the further they moved from the zero-Covid period, the greater their confidence. “For me personally, this was a really important trip because I got a much better understanding of how the economy is changing and more about the structural drivers,” he said. He pointed to China’s efforts to reduce carbon emissions and increase the integration of technology into the economy – for example through automation. These two broad categories of “green” and “digital” economies are growing rapidly, contributing 1.6 percentage points and 3.1 percentage points, respectively, to China’s GDP growth last year, while the real estate sector recorded a decline of 3.7 percentage points, according to KKR recorded estimates were released last week. China’s GDP rose 3% last year, under pressure from Covid-related restrictions that ended in December. Citi last week raised its China GDP forecast to 5% for the year, about in line with the national target. —CNBC’s Michael Bloom contributed to this report.
Comments are closed.