Winter winds for China trade

Thought of the day

by Chief Investment Office 14 Jan 2019

Offshore Chinese equities retreated by 1.6% on Monday, nipped by worse-than-expected trade figures for December and leaner growth signals for the year ahead. Chinese exports unexpectedly contracted by 4.4% last month, as front-loading faded and external demand from the US, Europe and Japan all softened. Chinese imports contracted by 7.6% y/y in spite of favorable base effects, fueled by double-digit declines for imports of copper, steel, coal and high-tech products. Adding to pressure, Reuters reported that China will trim its 2019 GDP growth target to a 6%-6.5% range, down from the official 2018 target of "around" 6.5%.

Today's data shows headwinds for China aren't yet at an end. But we see several reasons global investors should stay invested in Chinese equities:

  • The price is right. After a difficult 2018, Chinese stocks have come down significantly and are trading at attractive levels. MSCI China's 12-month forward PE has sunk to 9.92x, a significant discount against its 15-year average of 11.51x.
  • A helping hand. Policy easing efforts have ramped up in China as the economy weakens, with the central bank earlier this month announcing a one percentage point cut in its reserve requirement rate (RRR). We have raised our RRR cut forecast to include another 100 to 200 basis points in cuts this year, alongside proactive fiscal policy focused on infrastructure.
  • Appetite for a deal. Senior figures from both governments have returned to the negotiation table, with media reports suggesting President Trump is eager for a quick win. For President Xi, a sharper than anticipated deterioration in economic activity may add to the sense of urgency for a negotiated settlement.The trade dispute and a slowing domestic economy made Chinese equities one of the worst-performing asset classes in 2018, and as such we hold a cautiously optimistic view on them in 2019. However, positive signals on the China-US trade conflict and policy support add to our confidence that fundamentals are more solid than market sentiment and valuations suggest. China is one of our preferred markets within our Asia portfolios.

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