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 apparent. 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 simultaneously lowered their GDP growth projections for the country in 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 sharpest decline since 2015. The downturn could be more severe as month-over-month data also shows a steep decline. Although the Chinese government has introduced stimulus packages, including lowering policy rates and providing capital to cities to purchase unsold real estate inventory, the disbursement of funds and their impact have been slow.
There is a mismatch between oversupply and weak demand in tertiary markets, while primary markets face their own challenges. This makes it even more difficult for local governments to implement their real estate purchase policies.
Deflationary pressures are building. 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 falling since the end of 2022, with a 1.8% drop in August, the steepest decline in four months.
Concerns about a deflationary spiral are well-founded as domestic consumers are increasingly limiting their spending on non-essential items. At the same time, real estate prices continue to fall, and overproduction in China is 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 support for the capital, real estate, and stock markets, as macroeconomic data signals a downturn. Such sweeping changes by the government and the People’s Bank of China (PBOC) are unprecedented. Only on rare occasions in the past has the PBOC cut policy rates and the required reserve ratio (RRR) within 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 generating short-term positive psychological effects in the markets.
Meanwhile, questions remain about the clear impact of these measures. The effectiveness of cutting policy rates is uncertain. Reducing the mortgage rate by 0.5 percentage points may help approximately 50 million households lower 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 success 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 packages providing capital to cities to purchase unsold real estate inventory for conversion into social housing are also facing 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 real estate inventory, especially in tertiary markets.
SEVERAL VIETNAMESE INDUSTRIES ARE 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 most vulnerable to these risks include aviation and services: Chinese tourists have always accounted for a significant proportion of international visitors to Vietnam and are the highest spenders. A downturn in China’s growth affects the income of its citizens, leading them to cut back on non-essential spending, which significantly impacts 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 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.
