Igor Kutyaev
From COVID-19 lockdowns, to supply chain issues, to housing woes, China’s economy has faced numerous challenges. But are there opportunities for investors to be found? Greg Bonnell speaks with Haining Zha, Portfolio Manager at TD Asset Management, about the outlook for the economy and markets.
Greg Bonnell: Haining Zha is a portfolio manager with TD Asset Management, and he joins us now. Great to have you on the program. Let’s start there about the situation in China. You say they may be turning a corner.
Haining Zha: Yeah, actually, before I go into the economic outlook, maybe I can mention briefly about the general philosophy of investing in yen. It is critical, because it will change the way you view the data points. So when investing in yen, there are three things you have to keep in mind. Number one, you have to be a little bit contrarian, i.e. you have to go underweight when the risk is under the radar. And you have to go overweight when the risk is fully exposed.
And the second one is you have to pay attention to the Fed hiking cycle, because it will impact the capital flow and emerging market currencies. And the third thing is you have to pick the structural winners. So viewing from this template, looking at China, obviously, number one, all of the risks are exposed, be it COVID risk, or regulatory policy risk, or some of the other risk.
So on that angle, China, many of the risks are actually being dealt with, or is moderating. And the second one is, the Fed policy cycle, right now, the Fed policy cycle is probably towards the end and the market is already pricing in a cut in 2023. And the third one is structurally, China is still a large, stable yin country with a huge consumer base, and a great industrial base. So none of that has changed.
And I think in the second quarter this year, China’s economy decelerated mainly because of COVID lockdown. Year on year in second quarter, it only registered 0.4% growth. Nonetheless, to achieve the full year target of 5.5% for the rest of the year, it will play catch up.
Greg Bonnell: That’s interesting, and lays a nice groundwork for us when we think about China and the climate there. Obviously, the world’s second largest economy when they have an appetite for commodities, I think of, is good for other parts of the global economy. What about a slowdown in the broader global economy? What effect would that have on China? Because of course, they sell goods to the world as well.
Haining Zha: Right. The simple answer is, when you have global demand slowdown, none of the major economies can be spared, including China. So it would definitely negatively impact China’s economic growth. And I think the biggest impact probably will be on the export sector.
And benefiting from the super strong goods demand in 2021, Chinese export growth registered almost 30% year-over-year growth. And year-to-date, it is still not bad. It is still something around 14%-15%, still very, very strong. And I think when the global goods demand slows down, it will be a major shock to the manufacturing business, as well as exporters.
But on the other hand, when you see a material global slowdown, it probably will bring the Fed hiking cycle to an end, which means the PBOC can ease their policy further to support domestic economy.
Greg Bonnell: What is going on — and these have been some fascinating headlines — when it comes to China’s property market? What’s going on in real estate? I mean, one of the headlines that jumps out to me in recent days are, people not making their mortgage payments? What’s the story behind all that?
Haining Zha: Right. It is actually not a new risk. The situation has been difficult for real estate developer for quite some time. So since the government established so-called red lines on several liquidity and leverage metrics, external financing has been difficult for real estate developers. And also, the COVID lockdown make the condition even worse. As you can imagine, when you are in the lockdown, it is very hard to complete real estate transactions. So those developers, it is very hard for them to effectively recycle cash from housing sales. And the headline is simply a reflection of that.
Developers run into cash crunches and they cannot deliver housing project on time. And moreover, the customer deposit that’s supposed to be sitting in a trust account were found used elsewhere, which is not good news. And according to some estimate, the total unpaid mortgage balance mentioned in this headline could be as high as $2 trillion. So that would definitely have some impact on the banking system.
But on the other hand, all of these estimates are based on the unpaid mortgage balance. So if you look at the amount of financing that is needed to complete those housing project, that could be a much smaller number. And also, now the government is already actively working on it. So we still expect the real estate situation to be under control over time. And we actually expect government will continue to further ease the financial condition.
And we are actually already seeing bits and pieces in the June social financing data. What we see is real estate development loan was increased by a sizable amount month-over-month. And also, starting in July, the PBOC started a net increase in liquidity in their reverse repo operation.
Greg Bonnell: Very interesting stuff on that front. So much to talk about here with China. I’ve only got about a minute or so left with you. But I did want to talk about all the concerns we have globally about energy security. What does that mean for China, and what could it mean for their energy sector?
Haining Zha: Right. Actually, one of the greatest investment opportunities in China right now is on renewable energy. As you know, the whole world is trying to go green right now. One purpose is for the environmental reason. The other one is to secure the energy security. And in China, China is one of the biggest energy consumption country in the world. It accounts for about 1/4 of the world’s energy consumption.
And right now, the renewable energy is only 14% of primary energy consumption in China. And over time, their target is they are trying to increase to more than 25%. So there will be tremendous amount of room for future growth. And just to give you one example on the solar and wind, right now the installed capacity for both is around 340 gigawatt. And in 2030, the government’s target is, it will increase to about 1,200 gigawatt, which is doubling the existing capacity. So there is definitely a tremendous amount of growth.
Greg Bonnell: Fascinating stuff. Thanks for joining us today.
Haining Zha: Thank you for having me.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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