A Silver Lining in China's Clouds
by Hayden Briscoe, Asia Pacific Fixed Income, AllianceBernstein
China’s new Five-Year Plan reinforces the government’s pro-growth and reformist credentials. While this may not be enough in itself to reassure worried investors, we see some fundamental trends which provide encouragement for the country’s economic outlook in 2016.
The changing mix of China’s economy means that the manufacturing and heavy industry sectors, the country’s traditional growth drivers, are unlikely to regain their former dominance. Instead, growth in future will include an increased contribution from the consumer and services sectors.
This structural theme, in our view, is important for understanding the medium- to long-term direction of China’s economy. That doesn’t mean, however, that all the good news about China’s economy has been indefinitely postponed to some future date, or that it will come only from consumption and services.
Indeed, we detect some silver linings in the clouds hanging over China’s nonservices sector.
Liquidity Builds for Infrastructure Finance
After slumping in 2012, when President Xi Jinping came to power and implemented an anti-corruption program, infrastructure has recovered and stabilized while manufacturing and housing have continued to decline (Display).
While we don’t see any turnaround in manufacturing in the foreseeable future, we are more positive on infrastructure and housing. In the case of infrastructure, we expect the new Five-Year Plan—a summary of which has been released, with full details to appear in March—to maintain investment at current levels at the very least and, possibly, to increase it.
There is, in any case, a great deal of liquidity waiting to be invested in infrastructure—a result of the exponential growth in the municipal bond market, created earlier this year after the central government forced local and provincial governments to reduce their reliance on bank finance. Current outstandings are RMB3.7 trillion (US$580 billion).
Housing Fundamentals Improve
In housing, we see the possibility of a cyclical upswing, possibly by the middle of next year. Supply (as represented by Floor Space Started) and demand (Floor Space Sold) are now in balance, and excess supply is diminishing steadily (Display).
Our research shows that housing prices in Tier 1 and Tier 2 cities have begun to rise, and that the trend is spilling over into Tier 3 cities. If these trends continue into 2016, we expect them to trigger a revival in property development. This will surprise the market, which has interpreted the downturn in the sector as the bursting of a bubble, rather than a cyclical change.
A revival in property development would also be supportive for the broader economy, in our view, and positive for the global commodities market—although we’re not suggesting that demand for commodities will return to anything like pre-2012 levels in the foreseeable future.
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.
