UK Firms, Global Investors Adopt Defensive Strategies In China’s Challenged Markets Even As China’s Leadership Convenes To Strategize Growth Targets And Stimulus Plans For 2024

UK firms are holding off on investment decisions in China as they perceive a slowdown in the country’s growth, a survey by the British Chamber of Commerce in China reveals. 

Sixty per cent of British firms consider the decelerating Chinese economy a greater challenge than the COVID-19 restrictions in place until late last year. 

The survey indicates that, despite a slight improvement from the peak pessimism during the pandemic, UK businesses are postponing new investments in China due to a sluggish economic recovery.

Several factors contributing to this hesitation include:

• A less robust post-pandemic recovery.
• Chinese authorities conducting office raids.
• Diminished investment incentives from cash-strapped local governments.
• Higher investment yields in the United States. 

The sentiment survey, conducted over October and November, shows that 60% of companies find doing business in China more challenging, with 78% attributing the difficulties to economic factors. 

Notable members of the chamber, including AstraZeneca, BP, Jaguar Land Rover, and Shell, are among those delaying key decisions regarding investment and market entry. 

Geopolitical tensions and regulatory issues, such as license acquisition, are additional obstacles, with over half of the surveyed companies citing geopolitics as a challenge and 43% struggling with regulatory matters. 

The report notes that while British businesses are cautiously optimistic, there is a trend of downgrading China’s importance in global operations. 

Only 40% of firms consider China a “high priority,” compared to 59% in the previous year. 

Trade between the UK and China reached £111 billion ($140 billion) last year, positioning China as the UK’s fourth-largest trading partner, according to the British National Bureau of Statistics.

Investors Pivot to Defensive Strategies in Anticipation of Challenging Year for China’s Markets in 2024

With China underperforming global markets for three consecutive years, investors gearing up for 2024 are adopting defensive measures, targeting businesses with global resilience or insulation against economic downturns. 

The focus is on companies in defensive sectors, including health, medical innovation, and exporters in the electric vehicles supply chain and advanced manufacturing. 

Despite optimistic forecasts from Morgan Stanley and Goldman Sachs about the broader Chinese market in the coming year, slower-than-expected economic recovery has prompted a shift in investment strategies.

Wang Qing, Chairman at Shanghai Chongyang Investment Management, explained, “Since economic recovery is slower than expected, we lowered exposures sensitive to macro cycles.” Chongyang is now favouring defensive high-dividend stocks, globally competitive medical innovators, and advanced manufacturing with backing from Beijing.

The shift comes after China’s CSI300 index sank to five-year lows, experiencing a 12% decline in 2023 compared to a 15% gain for global stocks. The Hang Seng in Hong Kong fared even worse, sliding over 18% amid a property crunch and a sluggish COVID-19 recovery. 

Foreign outflows reached a net 138 billion yuan ($19 billion) in the year’s second half via the Stock Connect scheme, reflecting investors’ uncertainty.

Caroline Yu Maurer, Head of China and Specialized Asia Strategies at HSBC Asset Management, noted that investors are grappling with identifying the next growth driver for China. 

While Goldman analysts target a 23% increase in the CSI300 by the end of 2024, reaching 4,200, Morgan Stanley is more conservative, forecasting 3,850 for the blue-chip index and 18,500 for the Hang Seng.

Real estate’s struggles, accounting for a quarter of China’s economy, are evident as developer failures and a crisis of confidence impact the sector. 

Moody’s recent downgrade warning on China’s credit rating emphasises the challenges, with shares of Country Garden, once the largest private property developer, down 73% this year.

Amid concerns, investors like Indus Capital Partners are turning towards exporters and multinationals, favoring businesses less affected by China’s domestic demand issues. 

Notable performers include PDD Holdings, owner of the U.S.-based shopping app Temu, and discount retailer Miniso.

While some see opportunities for bargain hunting, including shipmakers with robust order books, others remain cautious. 

Jefferies has turned “tactically positive” on China, citing an appreciating yuan and cheap valuations. However, a survey by BofA Securities in November indicates that a majority of Asia fund managers are either awaiting improvement or exploring alternative investments, signalling a reluctance to hastily increase exposure to China.

China’s Leadership Convenes to Strategize Growth Targets and Stimulus Plans for 2024

China’s top leaders, including President Xi Jinping, initiated a closed-door meeting on Monday to deliberate economic targets and devise stimulus plans for the year 2024, according to four sources familiar with the matter. 

Expected to conclude on Tuesday, the annual Central Economic Work Conference holds significant weight as it shapes the trajectory of the world’s second-largest economy.

Investors keenly observe this meeting for insights into next year’s policy and reform agenda, given China’s ongoing challenges, including a deepening housing crisis, local government debt concerns, slowing global growth, and geopolitical tensions.

The Politburo, a key decision-making body of the Communist Party, announced on Friday that fiscal policy would be moderately strengthened, emphasizing flexibility, moderation, precision, and effectiveness to drive economic recovery. 

Despite prior policy measures, authorities are facing mounting pressure to introduce further stimulus.

Government advisers have indicated recommending economic growth targets for 2024 in the range of 4.5% to 5.5%, with a preference for around 5%, aligning with the target set for the current year. 

A policy insider, speaking anonymously, stated, “We are likely to set a growth target of around 5%,” emphasizing the need for intensified policy support.

Citi analysts anticipate China setting a fiscal deficit target of 3.8% of GDP, coupled with 3% of GDP from special treasury bonds amounting to 1 trillion yuan ($139.32 billion). 

Additionally, a special local government bond quota of 3.8 trillion yuan is expected. In October, China unveiled plans to issue 1 trillion yuan in sovereign bonds by year-end, adjusting the 2023 budget deficit target to 3.8% of GDP from the original 3%.

While the meeting is anticipated to endorse key economic targets, these details will only be made public during China’s annual parliamentary meeting, typically held in March. However, despite challenges, China remains on track to achieve the government’s growth target of approximately 5% for the current year.

The Last Bit, As China’s leadership engages in crucial discussions to determine economic targets and stimulus plans for 2024, the global financial community awaits signals that could influence the course of the world’s second-largest economy. 

The challenges posed by a deepening housing crisis, local government debt, global economic slowdown, and geopolitical tensions stress the significance of the decisions emerging from the annual Central Economic Work Conference. 

While a growth target of around 5% for the coming year seems likely, the emphasis on flexible and effective fiscal policies indicates a readiness to adapt to the evolving economic conditions.

Investors will be closely monitoring the government’s strategic responses, especially in light of Moody’s recent downgrade warning, highlighting concerns about managing debt, the property crisis, and their potential impact on economic growth. 

The upcoming months will provide more clarity on the specific policy measures and reforms that China plans to implement to navigate these challenges. 

The decisions made during this closed-door meeting will significantly shape China’s economic trajectory in the coming year, with global implications.