Due to a deteriorating recession in China’s housing sector, Goldman Sachs has reduced its prediction for the MSCI China index. According to a study published late Thursday, the investment bank reduced its earnings forecast for the index to zero growth for the year, down from 4% earlier.
Analysts also reduced their MSCI China price prediction for the following year to 81 from 84. MSCI China tracks over 700 Chinese stocks listed around the world, including Tencent, BYD, and the Industrial and Commercial Bank of China.
The index has dropped more than 6% in July alone, as concerns about China’s property market compounded existing worries about Covid, tech regulation, and geopolitics.
The new, lower target implies additional 18 per cent upside from the index’s close of 68.81 on Friday, but it also implies that the index is likely to fall by approximately 3 per cent this year rather than rise slightly.
The Chinese property market has been under renewed pressure in recent weeks, as many homebuyers have ceased making mortgage payments.
They claimed that the cash-strapped developers were taking too long to finish building flats that had been purchased before completion, as is typical in China.
Down recent years, Beijing has attempted to rein in developers’ reliance on debt for growth. When huge names like Evergrande declared bankruptcy late last year, investors were concerned about the impact on the rest of China’s economy.
“Residential-led growth” for China’s economy is coming to an end, Henry Chin, head of research for Asia-Pacific at CBRE, said Monday on CNBC’s “Squawk Box Asia.”
He pointed to an underlying market bifurcation: rising housing demand in China’s larger cities, but excess in smaller areas that might take “up to five years” to absorb.
According to Moody’s, real estate and related businesses account for more than 25% of China’s GDP. Goldman’s property team has reduced its prediction for new housing starts by 33 per cent year on year in the second half of the year, compared to a 25 per cent reduction previously expected.
Equity analysts at the investment bank predict state-controlled property developers to beat those not owned by the state. Goldman favours automobiles, internet retailing, and semiconductors among China equities, but is wary of bank stocks due to their exposure to housing-related loans.
Goldman economists trimmed their China GDP projection to 3.3 per cent from 4 percent earlier this month. “All the unresolved concerns in Covid and housing, as well as the heightened dangers in global demand and Chinese exports,” the economists said.
China reported 0.4 per cent GDP growth from a year ago in the second quarter, bringing total growth for the first half of the year to 2.5 per cent, significantly below the stated full-year target of approximately 5.5 percent.
Real estate investment declined 5.4 per cent in the first half of the year, worse than the 4 per cent drop in the first five months of the year.
Ting Lu, Nomura’s top China economist, said in a Friday research that “the recession may be substantially worse than data imply,” and that the property industry “deteriorated beyond even our negative forecasts.”
“The outbreak of Omicron and lockdowns from March to May have materially worsened the situation, as lockdowns have limited Chinese households’ purchasing power and reduced their appetite and ability to purchase new homes,” Lu said.
While the number of new Covid cases in China has risen to several hundred per day, the majority of infections have occurred in the country’s centre rather than the metropolises of Beijing and Shanghai.
(Adapted from SouthChinaMorningPost.com)