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 marks the lowest forecast among the predictions made by these institutions.
According to recently released August data, prices of new and secondary real estate fell by 5.5% and 8.6%, respectively, compared to the previous year, representing the sharpest decline since 2015. The downward trend could intensify as month-on-month (MoM) data also shows a steep drop. 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.
While there is oversupply and lack of demand in tertiary markets, the opposite is true for primary markets, making it even more challenging for local governments to implement their real estate purchase policies.
Deflationary pressure is building up. As per the National Bureau of Statistics (NBS) report, China’s consumer price index (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 producer price index (PPI) has also been declining since the end of 2022, falling by 1.8% in August, the sharpest drop in the last four months.
Fears of a deflationary spiral are well-founded as domestic consumers are increasingly refraining from spending on non-essential items. Additionally, the continued decline in 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 those implemented by the People’s Bank of China (PBOC) are unprecedented. Only on rare occasions in the past, such as in 2008, has the PBOC cut both benchmark interest rates and the reserve requirement ratio (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. Therefore, the government’s stimulus packages are only generating short-term positive psychological effects on the market.
Meanwhile, questions remain about the effectiveness of these measures. The benchmark interest rate cut may not significantly alter the situation. While the 0.5 percentage point reduction in mortgage rates could help approximately 50 million households save a total of about 150 billion CNY in annual interest payments, equivalent to a 0.1% increase in GDP, the reality of consumption and borrowing poses a considerable challenge to the policy’s success.
The aging population, rising unemployment rates in major cities, slowing wage growth, and a lackluster real estate market are all contributing to restrained consumer spending.
Public spending is lagging compared to the aggressive monetary policy. Contrary to the bold monetary measures, public investment is progressing slower than the budget plan, mainly due to local government implementation. The packages providing capital to cities to purchase unsold properties for conversion into social housing are also facing disbursement issues.
KBSV attributes this to the imbalance between risk and yield after the asset conversion, coupled with the high debt levels of local governments, which particularly hinder the purchase of unsold properties 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, 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 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.
Export goods: 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 due to the frozen real estate market will result in a flood of cheap Chinese building materials in the market. This, coupled with the trend of major economies like the US and Europe toward import taxation, will create intense competition for domestic building materials companies.
