China has set a GDP target of around 5% for another year amid analysts’ concerns that there is insufficient policy support to achieve the goal.
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Chinese stock valuations are “too low” and investors should be wary of returning to the world’s second-largest economy, according to Sean Raine, founder and managing director of China Market Research Group.
New data showed China recorded its first month of inflation in February after four months of deflation, with the consumer price index rising 0.7% year-on-year after a 0.8% annual decline in January.
However, Rhine attributed this to the Lunar New Year period and insisted that deflation was “still looming over the Chinese economy.”
“What we’re still seeing, however, is that Chinese consumers, especially the wealthy, are very nervous – they’re still trading lower and missing out on big-ticket items,” Raine said on CNBC’s “Squawk Box Europe” on Monday.
“They are wary about whether the government is going to launch a bazooka-like stimulus program – clearly they won’t.”
He suggested that in the short term, global luxury brands may continue to struggle with a lack of demand in China, and that domestic electric vehicle (NEV) makers may face severe challenges.
China’s well-documented economic struggles have led to widespread falls in its stock markets over the past year as growth was dragged down by slumps in real estate and exports. The Chinese government plans for economic growth of 5% in 2024, and in 2023 it will reach 5.2%.
Admittedly, last week’s NPC performance report committed to maintaining “money and credit growth in line with real GDP and inflation targets,” potentially signaling that policymakers will try to push inflation a little harder toward the 3 target % compared to the previous year. “Zichun Huang, China economist at Capital Economics, said in a research note on Monday.
“But we believe China’s low inflation is a symptom of its high investment growth model. With reduced reliance on investment still a long way off, we expect inflation to remain low over the long term.”
“It’s too early to talk about a bull market”
While short-term headwinds mean the investment landscape remains challenging, Raine argues that measures taken to reconfigure the Chinese economy away from its traditional reliance on property and infrastructure are beginning to have an impact and the longer-term picture is more promising.
“China’s economy is weak, but it is not that weak. If you are a multinational corporation, if you want to drive growth over the next three to five years, the next China is China. This is not India – India is only a sixth of China’s GDP – this is not Vietnam. These are small markets so I do think investors should look at China again for the long term, it’s definitely investable,” he said.
“It’s too early to talk about a bull market, still need to be very careful, the economy is still weak – don’t get me wrong – the D word (deflation) is looming over China again, the labor market is still weak, but valuations are too low.”
Despite last month’s modest recovery, Hong Kong’s Hang Seng index is still down more than 14% over the past year, and Raine said he personally started investing in Hong Kong-listed A shares about a month ago, believing that ” The grades are too low.”