A Closer Look at the Numbers

The downward pressure on China’s economy continues to be driven by its zero-COVID policy as well as its weakening property sector. As reported data shows, China’s Manufacturing PMI fell into contraction territory in July to 49%, down 1.2% from the previous month¹ because of weak demand. Growth in total fixed-asset investment (FAI) also slowed to 6.1% YOY in 1H22 from 9.3% in 1Q22² due to a decrease in property investment and weaker growth in manufacturing.  

The correction in the property sector has been largely driven by Beijing’s implementation of their “three red lines” policy, a system set out to monitor and manage excess debt for developers, essentially imposing a liquidity squeeze. This has led some developers to abandon half-built projects, leaving buyers stranded. It has also led some buyers to halt payments on mortgages on unfinished apartments that may not be completed. Housing-related indicators from home sales to new starts have been in deep decline year to date.  

Taking Aggressive Action

Much like its global counterparts, ongoing economic weakness prompted the People’s Bank of China (PBOC) to take a firmer hand to balance the economy. Yet, China, unlike the United States and other developed economies, continues to have the ability to cut interest rates to stimulate the economy as core inflation remains low.  

On August 15th, the PBOC cut the interest rates on both their open market operations and medium-term lending rate by 10bp to 2.00% and 2.75%, respectively. The Bank continued to slash rates shortly thereafter with the next rate cut a week later on the 22nd. This second cut trimmed its five-year loan prime rate to 4.30% from 4.45% and its one-year loan prime rate to 3.65% from 3.70%.³

In addition to cutting rates, the bank infused Rmb200bn ($29Bn) of special loans to facilitate project completion. The special loans provide a 100% guarantee for onshore bond issuance by several qualified private developers and allow local authorities to adopt more flexible mortgage easing measures. The combination of rate cuts and loan provisions clearly shows the PBOC’s focus on supporting the property market and real economy. 

Encouraging Reasons to Stay the Course 

Despite the current negative macroeconomic backdrop and the weakness in the property market, the region continues to offer attractive opportunities for longer-term investors. China has a population of over 1.4 billion with a growing number of consumers driving consumption and is home to some of the world’s largest and most innovative companies. As the 2nd largest equity and bond market globally, China continues to offer clear diversification benefits.