What's the Impact of the Chinese Stock Market Slump?
For the second time this week, Chinese authorities decided to stop trading after the 7 percent decline 'circuit breaker' mechanism was triggered. However, despite this gloomy start to the year, Credit Suisse's Chief Asia Economist does not expect a disaster.
Chinese Stock Market Put on Hold
China's equity markets closed on 7 January 2016 after only half an hour of trading, as shares dropped by more than 7 percent to trigger an automatic 'circuit breaker' for the second time this week.
There seemed to be renewed concerns about an economic hard-landing in China after the National Bureau of Statistics (NBS) announced the fifth consecutive month of below 50 level manufacturing PMI in December, i.e. 49.7, which increased worries about listed companies' earnings prospects in 2016.
At the same time, we believe the renminbi's decline, to over 6.5 against the dollar on 4 January 2016, does not bode well for the valuation of Chinese H-shares, which trade in Hong Kong dollars (which is pegged to American dollars).
Besides, in anticipation of the elimination of the share-disposal ban by major shareholders of listed companies today, it appears that the market is front-running potential share disposals by major shareholders of Chinese companies. Through the Chinese government's Central Economic Working Conference held at the end of December last year, the authorities aimed to reduce industrial overcapacities, while more measures will also be introduced to lower inventory levels in the housing market.
Corporate de-leveraging, as well as operating cost reductions, will also be targeted in 2016; therefore, it appears to us that more stimulus measures will likely be introduced, especially at the consumer-end, in order to support consumer spending. While upstream sectors like metals and mining will likely see more challenges in the next 12 months, we believe that the downstream consumer sectors will likely see more reasonable growth. We remain overweight in China equities in anticipation of further monetary and fiscal easing.
Maintaining Our 2016 Growth Forecast of 7 Percent for China
Despite increased concerns in financial markets about China's growth prospects in 2016, we maintain our 2016 GDP growth forecast of 7 percent YoY versus the consensus estimate of around 6.5 percent. Our 2015 GDP growth forecast is 7.1 percent, which is similar to the consensus.
Our main thesis of stable growth over the next 2 to 4 quarters is driven by significant easing of monetary and fiscal policy. This will continue to support a recovery in consumer spending, the property sector, bank lending and infrastructure spending. We expect the export and heavy industrial sectors to remain weak in 2016. The services sector will continue to improve in 2016 driven by the new economy sectors.
Affected European and US Sectors – Exposure to China
The second halt on trading this week had global repercussions. The European stock markets traded lower on Monday and fell again on Thursday. While our outlook on China remains unchanged, recent uncertainty could result in higher stock price volatility, particularly for stocks with a relatively high exposure to the Chinese market. Within the S&P 500 and Euro Stoxx 600 universe, about 9 percent of the companies report their China exposure at above 5 percent of total revenues.
Additionally, about 30 percent of companies report their APAC exposure at above 5 percent of total revenues, which is likely to include exposure to China. The most exposed to a slowdown would be automobiles and luxury goods within consumer discretionary, capital goods, materials and technology.