Pitfalls & Pitch Calls: An eye on China

This article first appeared in Wealth, The Edge Malaysia Weekly, on August 29, 2022 - September 04, 2022.
Pitfalls & Pitch Calls: An eye on China
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As Malaysia transitions from the pandemic phase to the endemic phase of Covid-19, the reopening of the economy has thrown up various challenges such as labour shortages in certain sectors and higher input prices from still-jammed supply chains globally along with transport and logistics bottlenecks. However, a positive first quarter GDP growth of 5% is welcome and 9.9% for the second quarter is great. Driving the growth in large part has been the recovery of consumption and export growth contributed by commodities such as oil and gas, crude palm oil and, by far the largest contributor to GDP growth, electrical and electronics (E&E) exports.

This compels us to take a hard look at our largest trading partner, China, to gain insights into what may be in store for the rest of the year. Those following China and its zero-Covid policy may voice concerns about the negative impact of the strict policy that has resulted in painful lockdowns and dents to domestic consumption and investment. Another concern has been the Chinese property sector, which has recently seen property buyers stop paying their mortgages as they foresee their homes not being delivered by troubled developers.

The Chinese authorities have wasted no time in announcing measures to support the domestic economy. The State Council recently released policy measures on boosting infrastructure development in areas such as transport, water, energy and agriculture, in an effort to stimulate employment and economic recovery. The National Development and Reform Commission and the Ministry of Transport have jointly unveiled plans to expand China’s national road network to around 461,000km (162,000km of expressways and 299,000km of highways) by 2035 to support urbanisation. These policy initiatives indicate strong support for infrastructure and construction-related industries.

However, expect the recovery path to remain bumpy. Infrastructure spending is slow to mobilise even though the multiplier effects are large in nature. And any government action in addressing the mortgage payment suspension on delayed projects will likely take time. Nevertheless, the strong government support and dovish interest rate policy forms the favourable outlook on China and Hong Kong SAR.

China’s Ministry of Commerce and 16 other departments recently jointly released 12 policy measures to boost auto consumption by supporting parallel import and secondary market sales, and optimising relevant electric vehicle (EV) infrastructure such as charging stations and parking lots. This highlights policymakers’ support for the overall auto market.

Key areas highlighted in these measures include the support for consumers on EV purchases, especially in rural areas, and to promote construction of charging facilities. Another consideration is the promotion of used car trading and removal of unnecessary restrictions on used car distribution.

The notice also calls for the promotion of vehicle replacement and to improve recycling of scrapped vehicles. The notice also mentions support for parallel import vehicle businesses, construction of city parking facilities and auto financing services.

According to media reports, homebuyers of more than 100 projects across various cities have called for suspension of mortgage payments for pre-sold property projects that are experiencing construction suspensions and completion delays. The number of projects affected could increase further before any government actions to resolve the issue. This could make worse the liquidity pressures on Chinese developers and has raised concerns about Chinese banks’ asset quality and the potential loss of net interest income.

While the impact on the banking system is expected to be manageable, the mortgage payment suspensions could have a much wider impact on property developers. For example, homebuyers may be more cautious with pre-sales projects from private developers, further weighing on the overall property sales recovery. Banks could become less willing to extend mortgages for property projects by private developers. This would exert further pressure on developers’ liquidity and refinancing ability. Private property developers that have higher exposure to lower-tier cities would be more vulnerable. It is an area worth watching closely for future developments. On that basis, expectations are on the Chinese real estate sector and Chinese banks to face headwinds for a while yet.

The bumpy road to recovery for Malaysia and the rest of Asia will likely rest on the fundamental recovery of China to some extent. Investors will do well to have a diversified portfolio with a defensive tilt, having dividend-yielding assets, infrastructure exposure and resilient high-quality, fixed-income assets that ensure the investment portfolio can ride through this period of high inflation and bumpy growth recovery. Lastly, having a long-term investment horizon has the added benefit of providing investors with the resilience to stay invested through these challenging times.

 


Michael Lai is executive director of wealth advisory (wealth manage-ment) at OCBC Bank (M) Bhd