China’s faltering economic recovery prompts policy easing

Quarterly Market Overview Q3 2023 | Asia Pacific (excluding Japan)

Asia-Pacific equities (excluding Japan) suffered mixed fortunes during the period as investor sentiment waivered over the ability of China to push its economic recovery forward. July’s optimism that stimulus measures taken by China’s government would benefit the region waned as anxiety about the country’s economy grew. While China’s economic annual growth rate in the second quarter looked impressive at first glance, with a 6.3% year-on-year GDP growth rate, it was heavily flattered by a weaker prior year comparison. On a quarter-on-quarter basis, China’s GDP in Q2 grew 0.8% versus Q1. For context, China’s official annual GDP growth rate forecast for 2023 as a whole remains at ‘around 5%’.

Chinese equities dropped as economic data continued to disappoint alongside further problems in the debt-laden property sector. Some of the measures unveiled by the government to prop up the economy failed to meet investors’ hopes. However, above-forecast rises in Chinese industrial production and retail sales in August offered some hope that recovery was underway. In a move aimed at stimulating lending activity, the People’s Bank of China cut interest rates for the second time in three months in August, followed by a cut in its reserve requirement ratio for most banks in September. Boosting hopes of a turnaround for risk assets given enhanced policy support, the Chinese government also announced in August that it would reduce the stamp duty on stock trading, marking the first time it had been cut since 2008.

While concerns about China affected the mood of investors across the region, in Australia, growing confidence about the outlook for inflation was reflected in the Reserve Bank of Australia’s decision to leave interest rates unchanged at 4.1% in September for the third consecutive month. The central bank believed that inflation had passed its peak but would stay high for some time. Meanwhile, quarter-on-quarter increases in the country’s economic growth of 0.4% in the second quarter was a repeat of its first quarter growth.

Our view

We have a positive outlook for Asia Pacific (excluding Japan) equities, reflecting the opportunity to gain exposure to attractively valued markets and their faster-growing economies – the IMF estimates that China and India will contribute around half of global GDP growth this year. While China’s equity performance in particular has disappointed this year, its policy makers continue to have enviable room for manoeuvre. With inflation pressures absent, in recent months China has cut interest rates and loosened mortgage restrictions, lowering credit cost to businesses and indirectly incentivising households to spend pandemic accrued savings. Balancing attractive equity valuations, we are mindful of the current geopolitical climate as regards China, especially in the context of ongoing efforts by many global trading partners in the west to diversify and de-risk supply chains. While we remain vigilant towards the investment climate in the region, within our broader Asia Pacific ex- Japan allocation, we seek a value investment-style skew, recognising the positive optionality for a continued China-driven domestic economic recovery.