The IMF revised China’s GDP forecast higher. The International Monetary Fund (IMF) upgraded its 2023 GDP forecast to 5.4% (previously 5.0%) and raised the projection for 2024 to 4.6% (previously 4.2%), citing a “strong” post COVID-19 recovery. For the record, the economy rose 4.9% in 3Q2023, beating the median forecast of 4.6% over the same period with retail sales continuing rising at a gradual pace. We had previously highlighted in other publications that spending ability remains intact as guided by personal saving levels while post-pandemic may cause some changes in consumption behaviour. We had previously highlighted in our 2H 2023 Global Economic & Market Outlook Report – (Towards the Chequered Flag of Policy Tightening at What Cost? - published on 15 June 2023) that spending ability remains intact as guided by personal saving levels. The immediate key concern now is its real estate sector which is still posing a downside risk to the outlook. From our finding based on the financial statements of 10 real estate companies, losses widened further in 1H2023 with the sample’s average Return on Equity (RoE) spotted at -113.4% while average debt-to-capital ratio was ballooning at 474.4% as of 2022. Meanwhile, we also noticed that some real estate bonds are trading at less than 10 cents on a dollar with 38 YTD bond downgrade counts in the sector vis-à-vis its pre-crisis average of 8 counts.

Monetary & Fiscal stimulus have been introduced but more direct measures towards the real estate sector will be good for the outlook. The People’s Bank of China (PBoC) in two separate moves had cut the 1-year Prime Lending Rate by 20 bps to 3.45% and on the fiscal front, the government approved CNY1.0 trillion (USD137 billion) sovereign bond issuance and allowed local governments to frontload part of their 2024 bond quotas, a move to support the economy. The greater risk in this part of the world is lingering credit risk concerning the real estate sector with prominent names that had already defaulted on their bonds. Citing the IMF, measures to accelerate the exit of nonviable property developers, remove impediments to housing price adjustment, allocate additional central government funding for housing completion, and assist viable developers to repair balance sheets and adapt to a smaller property market should be considered.

We need to see improvement in China as it is an added impetus to the Ringgit. Since the US began its monetary policy tightening, the correlation between Malaysian Ringgit and Chinese Yuan is approximately 95%, far outpacing the Ringgit’s correlation with the USD DXY Index. We think this occurs by virtue of China being our major export market with 17% of overseas shipments went to China based on September’s trade data. Moreover, China remains as the global manufacturing hub and around 24% of our GDP pie centres along the manufacturing activities. Against this backdrop, China’s economic improvement coupled with ability to contain its real estate credit risk from spreading would certainly help the local currency in our view.

Source: AmInvest Research - 9 Nov 2023