After a recent trip to China, Nicholas Borst reports that while the Chinese economy is showing some signs of stabilization, there are still long-term structural problems holding back economic growth.
Video Transcript
Natalia:
Hello, my name is Natalia Iannuzzi and I'm here with Nick Borst, Seafarer’s director of China Research. Nick, thanks so much for joining us today. There's been quite a bit of interest in the China stimulus announcement at the end of September, but since then it's faded away a bit. You recently took a trip to China. Could you talk to us a bit about what you observed there? Any larger comments on the economy would be appreciated, but mainly from the fundamental company perspective.
Nick:
Thanks, Natalia. Yeah, as you mentioned, there was so much excitement and interest about China's stimulus earlier in the year. Since then, a lot of it's faded, a lot of the really dramatic market moves that we saw have pulled back a little bit. But I thought it was important to still go there, meet with companies in a variety of different industries and really figure out, is there something actually there? Are there important developments that we can see, sort of bottoms up, occurring in China at the corporate level that gives some indication about where the economy is headed?
And one of the kind of key takeaways from my trip was that, I think the Chinese economy is stabilizing in some ways. Some of the worst financial risks are being tackled head on, but we're not on a path to go back towards rapid growth by any measure. There are still a lot of long-term, deep structural problems in the Chinese economy that the different stimulus policies that were announced really don't get to the heart of. And so from that perspective, I think it's going to be a long bumpy road in China.
There'll be years that are a little bit up, years that are a little bit down. But, in general, we can expect a much slower growth rate than we've seen in the past.
And where that comes into intersection at the corporate level really varies a lot by different industries. I think there's industries in China, whether it's real estate or some of these other more legacy industries that are just never going to grow at the same rate that they did in the past. And so there's sort of a structural shift underway there.
But there's still some bright parts of the Chinese economy. There's a lot of different industries, particularly in the manufacturing sector that are striving to be at the technological leading edge who are highly exposed to overseas growth possibilities. And their trajectory might look a lot different. They may be able to grow faster even if the domestic economy is still relatively sluggish. So I think it's a very mixed picture, but overall slower growth in China. But some of the more acute financial risks that I was worried about earlier in the year, I can see steps being taken to address them going forward.
Natalia:
Thanks, Nick. One of the things you mentioned, and I'm glad you did, is the real estate market. It seems that the real estate market has really been at the heart of many of the issues in China in recent years and it seems like quite a few of the stimulus policies are meant to address the property market. Are you seeing any signs of those policies being rolled out and effective?
Nick:
Yeah, and if you look what has actually been announced, it's really clear that real estate has been probably the primary focus of these different stimulus policies. And so there's been a whole suite of different policies announced.
Many of them are focused on boosting demand, getting home buyers back into the market purchasing homes. And so mortgage interest rates have been cut, down payment requirements have been reduced, really to incentivize Chinese home buyers to start buying again. And there's been a real hesitation amongst many buyers because prices have been falling, developers have been going bankrupt. And so the hope is with some of these additional measures, they can increase demand for housing.
There's also been a whole spate of measures focused on helping property developers. As I'm sure the audience has been aware, so many of the big Chinese property developers have gone bankrupt. The sector has essentially been nationalized in the sense that only the SOE developers are left standing. And so there's more measures to unlock credit flows to developers so that they can finish projects and deliver housing.
And then finally, there's a whole suite of measures that are focused on what does China do with these millions of empty apartments and unsold housing complexes? How do they utilize that excess inventory for things like social housing and getting those excess housing units out of the market so things can return to a more kind of normal type of demand pattern.
So a lot of different things have been announced. From my discussions with economists and property developers, it really seems like the uptake on a lot of these policies is slow. So theoretically, everything that needs to be in place to get people back in the market has been announced, but it's not being utilized as quickly or to as great an extent as I think we need to see, to see a very sharp turnaround in the Chinese property market. So we may see some signs of stabilization, but we're not headed back to anything like we saw previously with rapid growth.
And just to provide the audience with some context on this, if you look at a lot of the key property market indicators, whether it's sales or investment, those have all fallen about 50% relative to where we were in 2021. So a very sharp correction in the property market overall. It may be stabilizing at this point, but it's stabilizing at a much lower level and that has very important implications for China's growth rate.
Natalia:
Thanks, Nick. Paired with that, not particularly very cheerful picture, the past year has brought continued uncertainty about trade wars as well as geopolitical concerns. How are you thinking about all these risks that are associated with investing in China now, but also looking forward to the coming year?
Nick:
Yeah, you're right. It's a very complex situation when it comes to investing in China, probably more complex than it's ever been. You have to look at a domestic economy that's slowing, what's the impact of all these different policies and then the potential for all of these international challenges in terms of trade wars and currency fluctuations. So investing in China is more complex than it's ever been.
One of the things I think is very important though, is just to root it in how Seafarer approaches investing overall in China, but also all of our other markets. It's not a macro-based approach. We're not making projections, China's growth rate is going to be this or that in any given year. It really is rooted at looking at individual companies, trying to understand the financial condition of that company, how their management team operates, and what is the operating environment for them more broadly.
And so in that sense, from that perspective, it varies tremendously. I think there are companies who are very exposed to a lot of these risks and dangers and we've seen that as we've delved into some Chinese companies and said, "Ooh, this company might be great itself, but it's facing all these risks that we really can't quantify." That's on one end of the spectrum.
On the other end, you have companies that are tapping into sources of demand outside of China, are actively preparing for the possibility of higher tariffs, restructuring their own supply chains and manufacturing bases to be less China-centric, less exposed to potential tariffs. And so as always, it really comes down to company by company understanding how they will be impacted by these various factors. And so that's how we're approaching China. That's how we approach all of our different markets.
To get to the other part of your question, though, what does this mean in China going forward? I think, as I said before, it will be a bumpy road in China. I came away from my trip to the country not feeling like the sky was falling, but feeling like we are in a slower growth environment, one that's likely to persist for a long time, and there's a lot of potential risks on the horizon. And so it's a very different environment in China than it was a decade ago or two decades ago. And it's one where I really think a focused, selective, careful exposure is the right way to go.
Natalia:
Thank you for those updates, Nick, and your insights. And thank you to our viewers for joining us today. For more of Seafarer's content as well as Nick's prevailing winds blog focused on China, please see our website.
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