“If you told me at the start of 2023, that the Fed will raise interest rates to 5%, the US treasuries will sell off and the US dollar will continue to hold steady, I would have said that emerging markets would absolutely collapse. But they didn’t. Actually, they were up 10% last year,” said Anuj Arora, head of emerging markets and Asia Pacific equities at J.P. Morgan Asset Management. Yet China was in a world of its own, down 10%, bringing the whole index lower given its heavy weight.
When 65% of your wealth is in real estate and it starts falling--you don’t feel good
What happened in China in 2023?
The consumer confidence of the “battered and bruised Chinese consumers” took an “absolute plunge during zero covid restrictions,” stated Arora during a presentation at the firm’s International Media Summit on 14 March 2024 in London.
He noted that there was a little bit of a bounce in the consumer confidence in the first quarter from 85 to 95, and then back to around 86, with scores above 100 indicating optimism, stymied by the start of the real estate crisis, which has seen real estate sales falling (-20%), followed by falling prices (-20%).
“When 65% of your wealth is in real estate and it starts falling--you don’t feel good,” assessed Arora. As a result, the Chinese have continued to save “trillions of renminbi” (7.80 RMB for €1) and it is reflected in the saving rate, which amounts to one-third of incomes. He believes that the excess savings are holding back the economy.
How to solve the predicament?
“There is the slow way where you let it fester, you have bad debt in the banking system, the bank stops lending and it carries on for years, even decades,” suggested Arora. It will not surprise anyone that he compared such an outcome with the Japan experience of the 90s.
Yet there a quick way to solve the plight, according to Arora. To draw a line in the sand, he proposed that the Chinese apply the US recipe of the noughties on subprime loans whereby you “convert bad debt onto the government balance sheet and rekindle that animal spirit. That’s exactly what China needs today.”
In addition, Arora suggested that other stimuli such as “printing money or promoting local government debt into central government” may also contribute to reduce the excess savings in consumers’ accounts. He is encouraged to see that the authorities have started stimulating the economy last August and “literally every week we see a new support measure.” He thinks that it takes a year for these measures to be reflected into the economic figures.
Good news: “It’s all in the prices”
Arora made his point that Chinese stocks are cheap. “Valuation are at all-time lows;” “we have to go back to the Asian financial crisis… when [the] Chinese equity market wasn’t developed to get valuations lower than one times price-to-book;’’ “this is clearing valuation;” “this is the longest drawdown that we have ever seen in China;” “foreign investors have capitulated;” “every stock with high foreign ownership was decimated over the last three, four months;” and “they have left the house.”
Just to be sure that we all got it, he added: “outside of the US, there is no other market that offers the stock selection opportunities that China does.” As reported in our first article out of the International Media Summit held in London earlier in March, where the , Arora argued that JPMAM has the security selection wherewithal with analysts in mainland China, Hong Kong and Singapore.
Delano was invited to attend J.P. Morgan Asset Management’s International Media Summit in London. The latter paid for accommodation and transportation.