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 lowered by major financial institutions, with a persistent downturn in the real estate market and the emergence of deflationary risks. 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 recently released August data, new and secondary real estate prices 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 inventory, 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 opposite challenges, making the local governments’ purchase of real estate even more difficult.
Deflationary pressure is 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, while 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. Meanwhile, real estate prices continue to fall, 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 deterioration. Such simultaneous moves by the government and the People’s Bank of China (PBOC) are considered 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 creating short-term positive psychological effects in the markets.
Meanwhile, questions remain about the clear impact of these measures. The cut in policy rates may not significantly alter the situation. A 0.5% reduction in mortgage rates could help approximately 50 million households reduce their annual interest payments by about 150 billion CNY, equivalent to a 0.1% increase in GDP. However, actual consumption and borrowing demand pose significant challenges to the policy’s effectiveness due to an aging population, rising unemployment rates in large cities, slowing wage growth, and a bleak 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 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 inventory, especially in tertiary markets.
SEVERAL VIETNAMESE INDUSTRIES ARE IMPACTED
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 interconnectedness between the two economies.
The sectors facing significant risks include aviation and services: Chinese tourists have always accounted for a large proportion of international visitors to Vietnam and are the highest spenders. A downturn in China’s growth affects their income, leading to reduced discretionary spending, which, in turn, impacts the number of Chinese 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: 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.
