From the "Beijing to Britain" newsletter:
Baillie Gifford China Growth Trust PLC posted weak half-year results - but is actually similar to other funds in this space.
• Less than ideal results from Baillie Gifford China Growth Trust PLC, the Edinburgh-based China-focused fund. Tuesday’s half-year results noted that its net asset value (NAV) total return underperformed against its benchmark in the six months to July 31. Per share fell 19% to 265.66 pence from 328.87p at January 31.
• The trust blamed China’s property market, which it observed has “deteriorated further, leading to concerns around financial stability.” Dryly it noted “Property company Country Garden and trust company Zhongzhi Enterprise Group made headlines for missing coupon payments on their debt. This led to predictions of the collapse of China's financial system - the same kind of dire prognostications made in 2001, 2008 and the Covid lockdowns.”
• However, justifying their optimism that things may yet turn around in China, BGCG said in its report “While weakness in property hurts growth within the economy, we think the risk of financial instability is low. Property sales are down almost 50 per cent from their 2021 peak but prices have barely budged. Why? Because China never experienced the asset price bubble that has precipitated almost every property market collapse in developed markets. Property prices have grown at around 7 per cent per annum over the last decade, but income growth has surpassed this at around 10 per cent per annum. Property should have become more affordable. And while developers such as Country Garden have become over-indebted, the Chinese consumer remains in very good health.”
• Policymakers should note BCGC’s following observations on why activity is “so depressed”:
• “Firstly, Covid lockdowns undoubtedly hurt consumer confidence. It's important to remember that lockdowns only ended in China in January this year, versus almost 18 months ago in the west. In addition, the size of the Chinese government's stimulus package equated to around only 10 per cent of GDP versus an average of 70 per cent in the West, and Chinese stimulus did not take the form of direct handouts. Instead, consumers saved
up an estimated $7tn of excess savings from their own earnings. Consumers, therefore, have money to spend and, as the trauma of Covid fades and income growth continues, we expect confidence to return and activity to improve.
• Secondly, the government's regulatory crackdown damaged private sector confidence. Indeed, the private sector's contribution to the Chinese economy is frequently underestimated. It accounts for nearly 50 per cent of tax revenue, 60 per cent of GDP, 70 per cent of technological innovation and most importantly, 80 per cent of jobs. It's been weak, partly because of Covid, and partly because of concerns that Xi Jinping no longer supports entrepreneurs. Over the past 12 months, the government has attempted to address these concerns by clarifying the rationale behind the regulatory crackdown. Some of our third party research providers argue that we're now witnessing the most concerted effort to support the private sector in the history of the People's Republic. This culminated in a 31-step support package aimed at promoting 'a bigger, better and stronger private sector'. The package seeks to improve market access, level the playing field with state-owned enterprises, strengthen access to finance and incorporate more private sector input into policymaking. Importantly, the latter may reduce the risk of future policy errors. As with the Chinese consumer, the private sector remains, on average, in very good health, with strong balance sheets and the ability to invest once confidence improves.
• Finally, what about debt and the risk of contagion? Aggregate debt levels are a challenge, but we think the risk of financial instability is low. The majority of debt in the Chinese system circulates within a closed loop, ie it is issued by state-owned banks to state-owned enterprises within the context of a closed capital account. This gives the government the ability to decide how quickly bad debts are recognised and to stagger recognition in line with economic activity. In addition, the risk of contagion from hidden debt within the system has been drastically reduced after the government's 2016-2017 campaign to clean up balance sheets and reduce shadow banking.
• Debt levels do limit the government's ability to offer a very large stimulus package. However, gradual easing remains viable. Indeed, the government's prudent approach to Covid stimulus and to the property market over the last decade means that it has many levers to pull. China is one of the very few countries that can lower interest rates in response to economic weakness without raising fears of stagflation. It has also begun to relax the restrictions it put on property in the early 2010s. For example, in July it gave local and city governments the go-ahead to relax restrictions on home purchases. In August we saw Guangzhou, a major tier-one city, become the first to act. We expect others to follow suit and for the government's gradual easing approach to bear fruit.”
• On the geopolitical front, BCGC stated “We continue to expect geopolitics and the US-China relationship to provide a long-term headwind to investor sentiment, particularly in the context of the upcoming election cycle in the US. However, we believe that the worst-case scenario of a clash of arms is unlikely.” It also relayed that having spoken to CEOs and boards of the major Chinese companies it invests in, there was “broadly positive and complimentary [feedback] about the new Premier, Li Qiang.”
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Spotted - business
A short section of things we jotted down this week
• British luxury car manufacturer Aston Martin says China is "tremendously important" to its future and has tipped the country to become its second biggest market behind the United States in the years ahead. Aston Martin's Executive Chairman, Lawrence Stroll, told CGTN Europe that China represents a key market for the company's future and expects the relationship with Geely to continue to go from strength to strength. He said: "China is tremendously important to Aston Martin. In the future, we believe it will be our second largest market after the United States and eventually obviously behind Europe and here in the UK. The UK is still very important being our home.”
