Moneycontrol Pro Panorama | Bull in a China shop

China economy

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The Chinese economy has garnered attention for unfavourable reasons, particularly following the turbulence in the real estate sector. Now entering its fourth year, the real estate crisis persists, marked by liquidity challenges, developer defaults, and a notable 30 percent decline in the government's land sales revenue.

Despite these hurdles, Chinese markets have exhibited robust performance compared to most other developing markets in the past two months. Since reaching its low in early February, the index has surged by 16 percent. This prompts an enquiry into whether underlying fundamentals are propelling the Chinese markets or if we are witnessing a recovery rally.

An examination of China's economic indicators reveals that despite the enduring strain on real estate, the Chinese economy expanded by 5.3 per cent in the first quarter. This growth is significant, considering that over a quarter of the economy (real estate) is not contributing to the GDP. Such figures from the world's second-largest economy carry credibility.

Additionally, while smaller in scale, other sectors of the economy are displaying resilience and momentum. Purchasing Managers' Index (PMI) data suggest a steady improvement in manufacturing for the past six months, coupled with uninterrupted growth in the services sector for 16 consecutive months.

Moreover, prominent Chinese enterprises are rewarding their shareholders through substantial buyback programmes, particularly notable among tech giants like Alibaba, Tencent, and JD. Furthermore, government-led stock market reforms advocating heightened transparency, increased dividend payouts, and investor protection are fostering the resurgence of the Chinese market.

Crucially, the Chinese market is trading at a considerable discount compared to other emerging markets, with a price-to-earnings ratio of 13.38, significantly lower than India's PE of 22 and the S&P500's PE of 21.

However, notwithstanding supportive fundamentals and attractive valuations, geopolitical risks loom. The strained relationship between China and the US persists, despite efforts from both sides to mend fences. With the US elections looming, China remains a focal point for criticism from both Democrats and Republicans.

Global brokerage firms are increasingly bullish on Chinese markets. UBS, for instance, has upgraded China and Hong Kong stocks to overweight while Goldman Sachs foresees a re-rating of Chinese stocks. The slowdown in the steep ascent of US and Japanese markets also suggests profit-taking and a heightened allocation to China.

If China's fundamentals strengthen and relations with the US improve, the rally in Chinese and Hong Kong markets is expected to continue, but that is subject to the performance of other markets.

A recent report by Bank of America underscores China's appeal as a hedge due to its inexpensive valuations, light market positioning, and low correlation with shifts in US monetary policy.

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Shishir Asthana
Moneycontrol Pro