QIC: Outlook on China

We have seen tentative signs of stabilisation following significant monetary stimulus. Property market conditions are starting to stabilise, with house prices rising in many cities in May and June and broader measures of economic activity have also shown tentative signs of improvement in recent months, allowing year-ended real GDP growth to remain at 7% in the June quarter. Stabilising the equity market has proven problematic. With the authority’s actions having arrested the slide in share prices, the CSI 300 initially rallied by 16% only to fall again by 10% over the last week of July. On the basis of current valuations, an argument could be made that the Chinese equity market is still vulnerable to a further 20% correction. The economic impact of the equity market rout should be modest. Equities account for only a small share of wealth amongst Chinese households, Chinese household leverage is low (on average) and corporate financing is dominated by the banking system rather than the equity market. We expect real GDP growth to average 6.9% in 2015, just below the authorities’ 7% target. (VIEW LINK)