BACK TO THE BOUTIQUE INVESTOR BLOG The Chinese Conundrum Kasia Kiladis ASIAN AND GLOBAL EQUITIES INVESTMENT SPECIALIST | VERITAS ASSET MANAGEMENT Since early this year, there has been no shortage of negative economic news on China and recent reports did little to offer any reprieve. China is under increasing pressure to stabilize its economy and remain attractive in light of shifting investor appetite. 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. LEARN MORE ABOUT VERITAS 1 Purchasing Managers Index, July 2022 2 National Bureau of Statistics of China, August 2022 3 Centralbanking.com, August 2022 Past performance is not a guarantee of future results. Diversification does not guarantee a profit or protect against a loss in declining markets. Investing involves risk including possible loss of principal. There is no guarantee that these investment strategies will work under all market conditions, and each investor should evaluate their ability to invest for a long term, especially during periods of downturns in the market. This represents the views and opinions of Veritas Asset Management. It does not constitute investment advice or an offer or solicitation to purchase or sell any security and is subject to change at any time due to changes in market or economic conditions. The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader theme. Data is from what Veritas believes to be reliable sources, but it cannot be guaranteed. Veritas Asset Management assumes no responsibility for the accuracy of the data provided by outside sources.