China – sea change in policy thinking
Just a few months ago we were rubbing our hands with glee. The dollar had rolled over and the 10-year Treasury yield had dropped from the 5.0% October 2023 high to just 3.7% as markets priced in a slowing US economy and further cuts by the Fed. A perfect backdrop for the Asia ex Japan asset class.
The election of Donald Trump has upended this narrative with America’s ‘animal spirits’ bursting into life with a series of recent data points (PMIs, JOLTS data, ISM services and All-industry PMIs to name just four) pointing to a resilient economic outlook.
The contrast with China could hardly be starker where tepid domestic consumption remains the major drag on the economy despite household savings climbing to new highs every month. There does, however, appear to be an increasing realisation from officials that boosting consumption is the key to get the world’s second largest economy moving again.
To quote PBOC Governor Pan Gongsheng speaking at the recent Asian Financial Forum in Hong Kong “The priority of macroeconomic policy should shift from promoting more investment in the past, to promoting both consumption and investment, with more importance attached to consumption.”
Several measures to boost consumption have been introduced (trade in subsidies for household goods, subsidies on EVs and pay rises for Government employees to name but three) in recent months and many more can be expected. Further stabilisation of the residential property market would also be very helpful.
At last, it appears that China’s record trade surpluses are now being understood by officials as an economic weakness and not an economic strength. This sea change in thinking is very welcome.
The Asia ex Japan regional index is already nearly 15% off the early October 2024 highs and, for the fourth year in succession, Asia ex Japan underperformed developed market equities. The short-term outlook remains uncertain but the saving grace for the asset class is that it is patently cheaper than developed markets. The forward price earnings ratio of 12.74x is one third lower while the running yield is one third higher. On a price to book measure Asia ex Japan is half the price of developed markets.
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