China will continue to slow, but will offer opportunities in fixed income, managers say

MADRID, 9 Oct. (EUROPA PRESS) -

The Chinese economy will continue to slow down next year, but it will offer some opportunities in sovereign fixed income, which "has a negative correlation with the main risk assets".

Some investment firms seem to have improved their prospects for the Asian giant in recent months thanks to the improvement in some macroeconomic data, but this is not the case with Generali Investments, which has lowered its growth forecast for China to 2.7% in 2022 compared to the previous 3.2% and 5.1% in 2023.

The firm's senior economist, Christoph Siepmann, explained that after China recovered for two months from the Covid-19 lockdowns, the acceleration "suffered a pronounced setback in the summer".

“There is no single, clear reason for this development, but local Covid-related lockdowns (which have increased again), housing sector headwinds coupled with droughts and deteriorating morale clearly contributed. It is not known if the recovery will resume," Siepmann stressed.

The International Monetary Fund (IMF) is a little more pessimistic than Generali Investments, and in July lowered its growth forecast for the country to 4.6%.

The current economic context in the country is very different from that in other economies: the People's Bank of China surprised the market by cutting interest rates in August for the third time this year in the face of increases by the central banks of the United States , United Kingdom or the Eurozone.

As Fidelity explained in a recent commentary, this drop is due to the continuous slowdown in growth due to the real estate slowdown, the weakness of consumption and the confinements due to Covid-19, while the deterioration of exports due to the fall in external demand also weighed on the economic outlook.

"Reactivating growth has become a matter of the highest priority and the Chinese monetary authorities, unlike their US and European counterparts, have the enormous advantage that domestic inflation remains below 3%," he added. the signature.

Given this situation, Fidelity believes that there is a high probability of further interest rate cuts in China in the short term, which would support the domestic Chinese bond market, but could also cause a weakening of the yuan against the dollar.

On the other hand, investors will be aware of the celebration of the XX Congress of the Chinese Communist Party, which will begin on October 16 and in which it could be decided whether the current Chinese president, Xi Jinping, is elected for a third term.

Diogo Gomes, from UBS AM for Spain and Portugal, pointed out that in this context the firm encourages investors to consider the possibility of diversifying their fixed-income portfolios by investing in Chinese 'onshore' bonds.

"They currently have a negative correlation with the main risk assets (equities and credit), while presenting low volatility and offering nominal and real income, characteristics that we consider to be more strategic in nature than mere tactical assignments," he stressed.

For Gomes, its appeal is "particularly interesting" in the current situation from the perspective of foreign investors, "who have the opportunity to generate additional returns simply by hedging currency risk."

The manager of the Abrdn, Kennet McMillan, highlighted in a recent interview with Europa Press emerging market bonds issued in local currency, which have "moderate" volatility compared to equities and reduce potential losses to 10% compared to the 42% average of the shares.

Analysts are not so optimistic about equities, although from the Swiss private bank Julius Baer they maintain that the Congress that is held in a week could "eliminate some uncertainties for the market".

The zero Covid policy in the country and the disruptions in the supply chain that have been dragging on since the pandemic are other factors that may influence the slowdown in the Chinese economy, although this second seems to be better than a few months ago .

From the purchasing agent in China MarOla Export, they have indicated that the country's factories have attended to their production as in times before the pandemic, with few exceptions, and would only have extended some production deadlines, but "nothing significant".

However, MarOla Export has explained that the country's factories may have lost customers who have gone to look for products in other markets given the current context. In any case, "once resolved, customers would surely resume their relationships with their Chinese suppliers," the company added.

The Chinese real estate sector made headlines in the economic press a few months ago: Evergrande, one of the country's largest real estate developers, recognized in October last year the risk of incurring default due to the difficulties in obtaining the necessary liquidity due to the suspension of work on several of the projects developed by the company.

The Chinese real estate company Sinic also announced a year ago that it will not be able to meet its payment obligations with its offshore bondholders on time due to the lack of liquidity.

Abrdn's chief investment officer for Asian equities, James Thom, noted in a comment earlier this year that this sector will continue to come under pressure, although some still believe it still offers plenty of opportunity if one is selective.