When it comes to good investment returns, many investors in recent years have not been able to avoid China. For a long time, nothing seemed to be able to hold back the success of the Chinese economy. Last year, however, the success story got a few big scratches: The Covid-19 Delta variant, an economic weakness and a possible debt crisis. In Beijing, the leadership still has a lot of work to do to remove the scratches. According to the latest reports, the debt crisis in particular – combined with the Evergrande issue – is likely to cause a lot of unrest in the Middle Kingdom and also on the international financial markets in 2022.
The construction company China Evergrande, which has got into financial difficulties, wants to postpone the payment date for payments due soon. The proposed change in the repayment date from January 8th to July 8th is due to the financial situation, the group recently announced without further details. Most recently, in addition to Fitch, Standard & Poor’s (S&P) also downgraded Evergrande’s creditworthiness further – to credit default in some areas and thus one step ahead of complete default.
Real estate sector risk factor
Nivedita Sunil, portfolio manager at Lombard Odier Investment Managers, wrote in a comment in mid-December that the Chinese real estate sector was worth 60 trillion dollars, it comprised 60 percent of household wealth and directly and indirectly up to 30 percent of China’s gross domestic product (GDP) make out. “If it collapses, it could have an impact across the sector and potentially lead to a decline in economic activity – as we saw in 2015.”
Christoph Scherbaum
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Image: Christoph Scherbaum
The real estate sector is a strategic sector as its activities cascade the supply chain (unpaid contractors, un-built houses), said Nivedita Sunil. “We estimate that a 10 percent decrease in construction activity equates to a loss of around 2 percent of GDP, and based on the current financing status of private developers, we estimate that annualized construction activity could decrease by as much as 30 to 40 percent if these tensions should persist. “
Stock market with potential for surprises
Against this background, many investors should be asked to what extent China remains (further) interesting as an investment option. Thomas Böckelmann, senior portfolio manager at Euroswitch asset management, sees potential for surprises in China in the new year. “The Chinese stock market experienced a total loss of confidence in 2021, also as a result of regulatory interventions by the Chinese government in numerous industries.” The interventions have gone so far that some strategists have already spoken of a “non-investable market”.
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Böckelmann said: “This assessment and also the violent market reactions appear to us to be exaggerated. In the last few weeks in particular there have been signals from the government that they are starting to provide support again, both monetarily and fiscally, and in contrast to other regions, China has sufficient ammunition and direct control options The economic engine for the global economy, the workbench for the majority of production and the sales market with the most solvent consumers.
Black swan for the global economy?
The current investment outlook from asset manager Eurizon also states that China will receive a lot of attention on the financial market this year. “Whether the Xi government will continue with the anti-market regulation of the economy begun last summer will be of great importance for the assessment of China by investors.” However, it is unlikely that China will want to isolate itself further, as this strategy backfires could. In the baseline scenario, Eurizon continues, “a less hostile attitude towards the market economy and some stimulus measures could reverse the trend in the performance of the Chinese stock market, which has been even worse than that of the global emerging markets over the past two years.”
Manfred Schlumberger, Head of Portfolio Management at Star Capital, is meanwhile more cautious in his assessment. “So far, the real estate market has been the main driver of the economy in China. The attempt by the Chinese leadership to deflate the real estate bubble in an orderly fashion, as well as the soon declining population and high vacancy rates, mean that this is no longer expected in the future. says Schlumberger and adds: “To combat the pandemic, China has always reacted with drastic lockdowns, combined with the corresponding consequences for global supply chains. In view of the rapidly expanding Omikron variant, there is a risk that growth will be significantly impaired if this policy is continued. ”It is easy to imagine what this would mean for the largest exporting countries such as Germany and Japan:“ China could definitely become one black swan for the global economy in 2022, ”said Schlumberger.
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