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’s economic growth forecast has been lowered by major financial institutions, including Bank of America, Citigroup, and Goldman Sachs, amid a persistent downturn in the real estate market and the emergence of deflationary risks. These factors indicate a clear downward trend in China’s economic growth.
Specifically, these financial organizations have lowered their GDP growth projections for China in 2024 to as low as 4.7%, falling below the government’s 5% target. This is evident from the recently published August data, which showed a 5.5% and 8.6% year-over-year decline in new and secondary real estate prices, respectively—the steepest fall since 2015. The situation may worsen as the month-over-month data also points to a downward spiral. Although the Chinese government has introduced stimulus packages, including interest rate cuts and the provision of capital to cities for purchasing unsold properties, the disbursement and impact have been slow.
There is a mismatch between supply and demand in the tertiary markets, while the opposite is true for primary markets, making the local governments’ task of purchasing unsold properties even more challenging.
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 consistently declining since the end of 2022, falling 1.8% in August—the sharpest drop in four months. These figures indicate a legitimate concern for a deflationary spiral as domestic consumers curb their spending on non-essential items, while falling real estate prices and overproduction in China are likely to exert downward pressure on commodity prices and domestic consumption.
In response to the worsening macroeconomic indicators, 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. Such sweeping changes in government policies and PBOC actions are unprecedented. Only on rare occasions in the past, such as in 2008, has the PBOC cut both benchmark interest rates and the RRR within the same month.
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 predominantly structural, and the government’s stimulus packages are only generating short-term positive psychological effects in the markets.
Meanwhile, questions remain about the tangible impact of these measures. The benchmark interest rate cut may not significantly alter the situation. Although reducing the mortgage rate by 0.5 percentage points could save approximately 50 million households a total of 150 billion CNY in annual interest payments, equivalent to a 0.1% boost in GDP, the reality of consumer demand and borrowing presents a considerable challenge to the policy’s effectiveness. An aging population, rising unemployment rates in major cities, slowing wage growth, and a bleak real estate market are all contributing to restrained consumer spending.
Public spending is lagging behind the planned trajectory. In contrast to the aggressive monetary policy, public investment is falling short of the budgetary plan, mainly due to implementation issues at the local government level. The packages providing capital to cities to purchase unsold properties and convert them 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 hinder 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 plaguing 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 consistently accounted for a significant proportion of international visitors to Vietnam and are among the highest spenders. A decline in China’s growth will impact the income of its citizens, leading to reduced discretionary spending, which, in turn, will result in a significant drop in the number of Chinese tourists visiting Vietnam.
Exports: As China is the second-largest consumer of Vietnamese goods globally (after the US), a weak Chinese economy will reduce the demand for Vietnamese products such as agricultural, aquatic, rubber, and wood products.
Building materials: The surplus capacity and high inventory levels resulting from the frozen real estate market will lead to a flood of cheap Chinese building materials in the market. This, coupled with the tendency of major economies like the US and Europe to impose import taxes, will create intense competition for domestic building materials companies.
