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 disappointing macroeconomic indicators.
CHINA’S GOVERNMENT STIMULUS PACKAGES ONLY HAVE SHORT-TERM PSYCHOLOGICAL EFFECTS
China has seen its economic growth forecasts downgraded by major financial institutions, with a persistent downturn in the real estate market and deflationary risks becoming apparent. These three factors clearly indicate a deceleration in China’s economic growth.
Specifically, financial organizations such as Bank of America, Citigroup, and Goldman Sachs have simultaneously lowered their GDP growth projections for 2024, with the lowest estimate being 4.7%, falling short of 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-over-year, marking the steepest decline since 2015. The downturn could be even more severe, as month-over-month data also shows a plunge in home prices. Although the Chinese government has introduced stimulus packages, including interest rate cuts and providing capital to cities to purchase unsold properties, the disbursement of funds and their impact have been slow.
There is an oversupply and lack of demand in tertiary markets, while primary markets face contrasting conditions, making it 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-over-year in August, marking the third consecutive month of weaker-than-expected growth. Meanwhile, consumer prices remained almost unchanged for most goods and services. The PPI has also been declining since the end of 2022, falling 1.8% in August—the sharpest drop in four months.
Fears of a deflationary spiral are well-founded as domestic consumers are increasingly refraining from spending on non-essential items. Meanwhile, falling real estate prices and overproduction in China are likely to put downward pressure on commodity prices and domestic consumption.
The Chinese government has swiftly introduced a series of stimulus policies, ranging from interest rate cuts to supporting the capital, real estate, and stock markets, as macroeconomic data signals deterioration. Such simultaneous moves by the government and the People’s Bank of China (PBOC) are unprecedented. Only on rare occasions in the past, such as in 2008, has the PBOC cut benchmark interest rates and the reserve requirement ratio (RRR) within the same month.
This highlights the urgency to prevent deflationary risks and achieve 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 generating short-term positive psychological effects in the markets.
Meanwhile, questions remain about the clear impact of these measures. The benchmark interest rate cut may not significantly alter the situation. A 0.5 percentage point reduction in mortgage rates could help approximately 50 million households reduce their annual interest payments by about 150 billion CNY, equivalent to a boost in purchasing power of 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 lackluster real estate market, all of which lead to restricted consumer spending.
Public spending is lagging behind the schedule. Contrary to the aggressive monetary policy, public investment is progressing slower than the budget plan, mainly due to implementation issues at the local government level. The support packages providing capital to cities to purchase 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 the high debt levels of local governments, which delay the purchase of unsold properties, especially in tertiary markets.
SEVERAL VIETNAMESE INDUSTRIES ARE LIKELY TO BE AFFECTED
According to KBSV, the Chinese government’s economic stimulus packages will have positive short-term effects, partially 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 facing significant risks include aviation and services: Chinese tourists have consistently accounted for a large proportion of international visitors to Vietnam and are among the highest spenders. A decline in China’s growth will impact their income, leading to reduced discretionary spending, which will result in a significant drop in the number of Chinese tourists to 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: Excess capacity and high inventory levels due to the frozen real estate market will result in Chinese building materials flooding the market at low prices. This, coupled with the tendency of major economies like the US and Europe to impose import taxes, creates intense competition for domestic building materials companies.
