Transcript
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Speaker: Hello from Hong Kong and welcome to another edition of Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: I'm Fred Newman, Chief Asia Economist at HSBC, back at our Asian headquarters here in Hong Kong after a few weeks on the road.
Speaker: My regular co-host, Herod van der Linde, is taking a break from podcasting duties this week as he travels around the U.S. meeting clients.
Speaker: But I'll be joined in a moment by Stephen Sun, head of research at our Chinese joint venture, HSBC Tianhai Securities.
Speaker: This week's show is all about mainland China, specifically what's caused the heavy losses on the A-share market this year and how the macro backdrop is shaping our expectations for the overall economy heading into 2023.
Speaker: Plenty to talk about, so without further ado, let's start the show.
Speaker: So when it comes to equity markets in mainland China, it's hard to sugarcoat the headline numbers.
Speaker: A shares are down about 30% year to date.
Speaker: Offshore investment via Hong Kong or what we call northbound investment is down nearly 80%.
Speaker: And even things like mutual fund issuance, for example, has really fallen by a similar amount.
Speaker: What's going on here?
Speaker: Well, joining me now to discuss what's behind this and how it's impacting investor sentiment is Stephen Sohn, Head of Research at HSBC Chiang Hai Securities in mainland China, who's just published his latest quarterly report on the A-share market in China.
Speaker: Stephen, great to have you with us today.
Speaker: Thanks for having me, Fred.
Speaker: So you've been speaking to a lot of investors inside and out of China, Stephen.
Speaker: Give us your take on what's been driving those A-share losses this year.
Speaker: That's correct.
Speaker: We have been talking to a lot of investors globally and domestically.
Speaker: I can certainly say that both the external and internal top concern, you know, it's the U.S. inflation,
Speaker: and also a zero COVID policy.
Speaker: Both have contributed to a significant liquidity decline into the A-share market.
Speaker: The COVID situation certainly affects willingness to buy equity products for investors in the China market.
Speaker: Externally, I think it's stopping U.S. inflation.
Speaker: And as a result of that, U.S. Fed playing catch up in terms of hiking interest rate very aggressively.
Speaker: So for those two reasons, we have seen inflow to the Asia market have dropped almost 80% year over year, both in terms of the northbound inflow as well as domestic and mutual fund insurance.
Speaker: Let's zoom in on the zero-COVID angle for a moment that you mentioned.
Speaker: Is it fair to say at this point that we underestimated really how widespread the outbreaks and lockdowns would be across mainland China?
Speaker: Yes, we have significantly underestimated the stickiness of zero COVID policy in China.
Speaker: This is probably the elephant in the room.
Speaker: Certainly, there's a lot of uncertainty in terms of the actual timing when China is going to materially change or to eventually end zero COVID policy.
Speaker: Clearly, there's a lack of consensus in the market.
Speaker: And in the meantime, it's extremely difficult to add value in terms of forecasting the actual timing for a material zero COVID policy change in China.
Speaker: So that's why we have decided in this report to look at more medium to long term issues concerning China's economic growth potential and more fundamental issues.
Speaker: Okay, let's focus on some of these more fundamental issues now, because it seems a lot of investors are asking the same question.
Speaker: And that's really, will there be a balance sheet contraction in China like we saw maybe in Japan in the 1990s?
Speaker: Now, before getting into that, give us some context here.
Speaker: What exactly happened in Japan in the 1990s?
Speaker: Certainly.
Speaker: Basically three decades ago, Japan's overly accommodative monetary policy was followed by rapid tightening with policy rate hikes trying to cool, overheating economy.
Speaker: That was believed to be a major contributor to the downturn in terms of land, property and the stock prices.
Speaker: And together with weak economic growth over the next three decades,
Speaker: It actually started to change behaviors for the Japanese companies.
Speaker: They decided to shrink their balance sheet, especially for the corporates.
Speaker: Instead of maximizing profit, repaying debt becomes the number one priority.
Speaker: And as a result of that, that's leading to the so-called balance sheet recession or balance sheet contraction, if you will.
Speaker: All right.
Speaker: Obviously, if you look at China right now, there are certain similarities to that.
Speaker: How would you describe it in Japan back then?
Speaker: Markets are down.
Speaker: Growth is slowing.
Speaker: There's lots of corporate debt.
Speaker: You've done various comparisons between the two scenarios.
Speaker: What have you found?
Speaker: That's correct.
Speaker: We have looked at eight or nine aspects of that.
Speaker: Let me just briefly walk you through.
Speaker: On the positive side, China has a much stronger GDP growth momentum going into the economic downturn versus Japan.
Speaker: And more importantly, China's per capita GDP is roughly 18% that of the US.
Speaker: Whereas, you know, Japan, when the stagnation started, the per capita GDP has already reached over 70% of the US.
Speaker: So certainly there's still much more room for growth in China's case.
Speaker: Another metrics we look at is stock market capitalization to GDP.
Speaker: When bubble burst in Japan, the total market cap reached almost 140% of GDP.
Speaker: If you look at China, the ratio is standing at slightly above 80%, telling you that the stock market is clearly much more reasonably priced in China's case.
Speaker: However, on the other side, the property bubble in China is certainly much more severe.
Speaker: both in terms of house price to income ratio, as well as house price to rent ratio, China has significantly exceeded the bubble period in Japan.
Speaker: On the corporate sector, China's corporate debt level is currently at over 150% GDP.
Speaker: That's actually much higher than that of Japan in the 90s.
Speaker: And last but not least, China's population growth has declined
Speaker: much earlier than Japan at a similar time.
Speaker: So with all that in mind, if we were to ask you, could we see a balance sheet recession in China like we saw in Japan a few decades ago, what would you say?
Speaker: Certainly investors are concerned about whether China could follow a similar path.
Speaker: At the end of the day, I think it's about capital allocation.
Speaker: It's about risk taking.
Speaker: It's about whether China could successfully reinvigorate animal spirit entrepreneurship in the private sector.
Speaker: So private sector versus public sector tends to be more innovative in terms of helping
Speaker: productivity game of the economy, private sector certainly can do a much better job.
Speaker: So on balance, we still believe China is unlikely to have a balance sheet contraction, especially if Beijing can manage to reinvigorate entrepreneurship and encourage investors back into the private sector.
Speaker: That's our conclusion for this report.
Speaker: Stephen, great to get your insights and many thanks again for joining us.
Speaker: Thank you.
Speaker: Well, we're going to wrap up here, folks.
Speaker: Many thanks for joining us under the banyan tree.
Speaker: We'll be back again next week to discuss more on markets and economics in Asia.
Speaker: Until then, take care and we'll talk to you again soon.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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