KBSV Securities has recently provided an assessment of China’s outlook and its potential impact on Vietnam, highlighting the confirmed weakness of the Chinese economy with many disappointing macroeconomic indicators.
CHINA’S GOVERNMENT STIMULUS PACKAGES ONLY HAVE SHORT-TERM PSYCHOLOGICAL EFFECTS
China has seen its economic growth forecasts lowered by major financial institutions, with a persistent downturn in the real estate market and deflationary risks becoming a reality. These three factors indicate a clear downward trend in China’s economic growth.
Specifically, financial organizations such as Bank of America, Citigroup, and Goldman Sachs have unanimously lowered their GDP growth prospects for the country in 2024 to as low as 4.7%, below the government’s 5% target.
According to newly released August data, prices of new and secondary real estate fell by 5.5% and 8.6%, respectively, year-on-year, the sharpest decline since 2015. The downturn could be more severe as month-on-month data also shows a steep decline. Although the Chinese government has introduced support packages, including lowering operating interest rates and providing capital to cities to buy back unsold properties, disbursement and impact have been slow.
There is an oversupply but a lack of demand in third-tier markets, while first-tier markets face the opposite situation, making it even more challenging for local governments to implement their real estate purchase policies.
Deflationary pressures are building up. According to the NBS report, China’s CPI rose only 0.6% year-on-year in August, marking the third consecutive month of weaker-than-expected growth, while consumer prices remained almost unchanged for most other goods and services. The PPI has also been falling since the end of 2022, with a 1.8% drop in August – the steepest in four months.
Concerns about a deflationary spiral are well-founded as domestic consumers are increasingly limiting their spending on non-essential items. Meanwhile, real estate prices continue to plummet, and overproduction in China is likely to put pressure on commodity prices and domestic consumption.
The Chinese government has swiftly introduced a series of stimulus policies, ranging from interest rate cuts to support for the capital, real estate, and stock markets, as macroeconomic data signals worsening conditions. Such simultaneous moves by the government and the People’s Bank of China (PBOC) are considered unprecedented. Only a few times in the past has the PBOC cut operating interest rates and the required reserve ratio (RRR) in the same month, with 2008 being an example.
This highlights the urgency in addressing deflationary risks and achieving the 5% growth target.
While the policies aim to ease pressure on various aspects of the economy, KBSV believes that the risks causing China’s current stagnation are more structural, and the government’s stimulus packages are only creating short-term positive psychological effects in the markets.
Meanwhile, questions remain about the clear impact of these measures. The operating interest rate cut may not significantly change the situation. A 0.5 percentage point reduction in the current mortgage rate could help about 50 million households reduce their annual interest payments by about 150 billion CNY, equivalent to increasing purchasing power by about 0.1% of GDP.
However, actual consumption and borrowing demand pose significant challenges to the policy’s effectiveness due to an aging population, rising unemployment rates in major cities, slowing wage growth, and a bleak real estate market, all leading to restricted consumer spending.
Public spending is lagging compared to the monetary policy trajectory. Contrary to the aggressive monetary policy, public investment is falling behind the budget plan, mainly due to implementation issues at the local government level. Support packages providing capital to cities to buy back unsold properties and convert them into social housing also face disbursement problems.
KBSV attributes this to the imbalance between risk and yield after converting these assets, coupled with high local government debt, which delays the purchase of unsold properties, especially in third-tier markets.
SEVERAL VIETNAMESE INDUSTRIES ARE AFFECTED
According to KBSV, the Chinese government’s economic stimulus packages will have positive short-term effects, somewhat improving consumer sentiment and supporting the real estate market. However, the medium-term decline in China’s economic growth is irreversible due to the structural issues faced by the world’s second-largest economy.
This remains a notable risk factor for the Vietnamese stock market due to the high level of interconnection between the two economies.
The sectors most affected by this risk include aviation and services: Chinese tourists have always accounted for a large proportion of visitors to Vietnam and are the highest spenders. A decline in China’s growth will affect the income of its citizens, leading them to cut back on non-essential spending, which will significantly impact the number of tourists visiting Vietnam.
Export goods: As China is the second-largest consumer of Vietnamese goods globally (after the US), a weak Chinese economy will reduce demand for Vietnamese products such as agricultural, aquatic, rubber, and wood products.
Building materials: Overcapacity and high inventory levels due to a frozen real estate market will result in Chinese building materials flooding the market at low prices. This, combined with the trend of major economies like the US and Europe toward import taxation, creates intense competition for domestic building materials businesses.
