China’s market outlook following recent economic data release and property sector woes

China’s July monthly economic data missed consensus expectations as economic headwinds intensify for the world’s second largest economy.

In response, the PBOC cut the benchmark MLF (one year lending rate) to 2.5% from 2.65%.¹ The 15bps cut is sooner and more aggressive than expected and is a positive sign that policymakers are taking bolder, more urgent actions to stabilize growth.

While a 15bps MLF rate cut is expected to lead to a commensurate cut in the loan prime rate – effectively the mortgage rate – this alone, is insufficient.

More monetary and fiscal stimulative measures are needed in order to put a floor on the property market and revive household and private spending momentum.

During the month of July, retail sales growth slowed to 2.5% y/y (from 3.1% y/y in June),² and when adjusting for seasonality and base effects, appears to have stagnated on a m/m basis.

While spending growth on services continues to outpace goods, calculations point to an all-around softening in consumption spending on a sequential basis.

China’s economic rebound this year is hinged on consumption spending, though this pillar of the economy has recently stalled, in light of record-high youth unemployment and a faltering property market.

Property market continues to face challenges

The biggest drag to the economy continues to be the property market. During the month, new home starts and home sales fell to a low not seen since December 2022, suggesting that both household and developers have grown more pessimistic over the past few months.

It’s no surprise that property investments have also fallen -8.5% YTD y/y.³

The latest financial problems with one of the country’s largest developers throws cold water on recent policy measures aimed to revive a troubled sector and problems at a large trust company could dampen the property market outlook.

Industrial production also softened for the month, dented by underwhelming domestic demand and falling global demand. 

Still, there appears to be a modest uptick in export sales for industrial firms in July, though this could be more of a blip since external demand is expected to continue facing some weakness for the remainder of the year.

Policy outlook and investment implications

China’s 10-year government bond yield is now 2.57% compared to the UST 10 year 4.19%.⁴ The significant yield gap, the largest since 2007, could be a key reason why capital remains planted in USD and UST for the time being.

More broadly, recent economic data releases in China have been disappointing, while those in the US have surprised to the upside.

Still, the PBOC set forth a stronger fixing over the past few weeks for the RMB and commercial banks in China were largely selling USD in order to help slow the pace of RMB depreciation.

China’s monetary policymakers have a balancing act to execute in the coming months:  supporting a domestic economy through lower interest rates without causing capital outflows.

Though I believe a lot of bad news is in the price of Chinese stocks, it would be good to have some positive surprises.

I believe Chinese stocks may be in a holding pattern until economic data starts to improve sequentially or when broad-based stimulus measures are announced, such as a household fiscal transfer or a meaningful relaxation of property restrictions in tier-1 cities.