Property Shines a Light in China’s Gloom

China’s economy has been slowing since 2007 and is expected to slow further. But we believe that it’s now possible to identify the beginning of trends that, in time, could ease China’s decline and help its growth to stabilize.

One of the interesting aspects of the correction in China’s A Shares market in June and July was that it refocused concerns on the country’s economic health, even though the rally (driven mainly by retail buying, margin loans and optimism about government reforms) and subsequent slump bore little relationship to economic fundamentals.

This lack of a connection was underlined by the economic data for August, which showed little change from the three months prior, when the A Shares market had been surging. On this evidence alone, we think that investor concern about China is out of proportion to the actual state of the economy.

The data showed a continuation in the sluggish growth environment. Amid the gloom, however, there was a welcome ray of light. It came from the property market, one of the sectors that has been of most concern to investors and policymakers.

Hopes Rise for Infrastructure

Housing investment and new project starts fell further in August; importantly, though, transactions stayed strong (up 15.6% year over year) and mortgage lending rose sharply (up 50% year over year, for the third consecutive month). Sales of household appliances and furniture improved, too.

These trends are particularly encouraging because they point to a true market-based correction brought about by rising demand and a relative scarcity of supply. They reflect a fall in housing inventory and the fact that property developers—still nervous after the equities crash and last month’s currency devaluation—are not rushing to build. In our view, however, the market is ignoring these signals and underestimating the potential for a spillover effect from the housing sector into the rest of the economy.

There is anecdotal as well as statistical evidence to suggest that momentum for an uptick in activity is starting to build. Earlier this year, the central government introduced a budgetary law that forced provincial and municipal governments to reduce their dependence on bank finance and raise capital in the domestic bond market. This gave rise to the municipal bond sector, which raised RMB1.7 trillion (US$267 billion) in its first three months of operation.

Once the central government announces its 13th Five-Year Plan next month, we expect this pool of liquidity to be channeled into infrastructure and other activities, which will provide a boost to the economy late this year and into 2016.

Warnings Are Misplaced

The switch by local governments from bank finance to bonds is a welcome development in its own right, as it reduces concentration risk in the banking system and contributes to overall financial stability. The growth of the shadow banking market, which until recently was another headache for regulators, has also become much less of a concern.

In light of this, the warnings in recent media and sell-side broker reports about the increasing downside risks to China’s economy—and the consequent negative implications for the global outlook—seem misplaced.

Instead, we expect that, by the middle of next year, China’s growth may well have steadied and formed enough of a base for a rebound. That, in turn, suggests that the current pricing of risk in China’s markets is far too conservative.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.

Director—Asia Pacific Fixed Income

Hayden Briscoe, Director of Asia-Pacific Fixed Income, joined AllianceBernstein in August 2009 and is responsible for the Asia-Pacific Fixed Income business and for managing global and regionally focused portfolios. He was previously a senior member of the Fixed Interest team at Schroders Australia, where he was responsible for domestic and global fixed-income funds and served on the multi-asset team. Prior to joining Schroders, Briscoe spent six years with Colonial First State Investments, where he managed local and global bond funds and had tactical asset-allocation responsibilities. He spent nine years with Bankers Trust in investment banking, starting out in the treasury, trading bonds, before becoming a proprietary trader. Briscoe moved to Macquarie for a short time after the Bankers Trust merger before he joined Colonial First State. He holds a BA in economics from the University of New South Wales. Location: Hong Kong

Senior Economist—Asia

Anthony Chan is a Global Economic Research Analyst with primary responsibility for macroeconomic forecasts and sovereign/interest-rate strategy for the Asian fixed-income markets. Before joining the firm in 1999, Chan was the chief group economist (Asia) for HSBC Economics and Investment Strategy, chief regional economist of MeesPierson Securities (Asia) Ltd., and senior China/Hong Kong economist of the Economist Intelligence Unit Ltd. He holds a BSc (with honors) in applied economics from the University of East London and an MSc in economic forecasting from the University of Leeds. He was appointed by the Hong Kong Special Administrative Region government to serve as an advisor to the Central Policy Unit from 1998 to 2000. Location: Hong Kong

Chief Investment Officer—Asia-Pacific ex Japan Value Equities

Stuart Rae has been Chief Investment Officer of Asia-Pacific ex Japan Value Equities since 2006. He served as co-CIO of Australian Value until 2012, and was CIO of Australian Value Equities from 2003 to 2006. Rae joined the firm in 1999 as a research analyst covering European consumer-cyclicals stocks. Previously, he was a management consultant with McKinsey for six years in Australia and the UK. Rae earned a BS (with honors) from Monash University in Australia in 1987 and a PhD in physics from the University of Oxford in 1991, where he studied as a Rhodes Scholar. Location: Hong Kong

Portfolio Manager—China Equities

John Lin is a Portfolio Manager for China Equities and also serves as Senior Research Analyst responsible for covering financials and real estate in China. He joined the firm in New York in 2006 as a research associate for Bernstein US Small and Mid-Cap Value Equities, then transferred to the Hong Kong office in 2008. Previously, Lin was an investment-banking associate at Citigroup. He holds a BS in environmental engineering from Cornell University and an MBA from The Wharton School at the University of Pennsylvania. Location: Hong Kong

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