Will the Australian stock market be influenced by slowdown in Chinese economy?

By Julie Vargas

Key Takeaways:

1. The Chinese government announced the stimulus package of 1 trillion yuan to strengthen the country’s growth and curb the fallout of the repetitive COVID-19 lockdowns.

2. Growing property crisis, losses in high-speed railways and the frequent COVID-19 lockdowns are causing slowness in China’s economy.

3. US and China are close to a deal to allow US accounting regulators to travel to Hong Kong to examine audit record of Chinese businesses listed in New York stock exchanges.

China has been a discussion topic amongst investors lately after the Chinese government announced the stimulus package of 1 trillion yuan, equivalent to US$146 billion, to strengthen the country’s growth and curb the fallout of the repetitive COVID-19 lockdowns. Other than this, the country is also facing challenges in the real estate and railway debt crisis.

On Wednesday, The State Council, China’s Cabinet, highlighted a 19-point policy package and another 300 billion yuan that State policy banks can invest in infrastructure projects. This package was announced on top of the 300 billion yuan announced in June 2022. Additionally, local governments will be assigned 500 billion yuan of special bonds from the earlier unused quota.

The announcement related to the stimulus package boosted market sentiment, which was evident on various stock exchanges worldwide. Post the release of the announcement, the ASX inched higher by the close of the trading session on 25 August 2022. Other than this, there is discussion in the market that the US and China are close to a deal to allow US accounting regulators to travel to Hong Kong to examine audit records of Chinese businesses listed on the New York stock exchanges. The talks between Beijing and Washington are in progress to avoid delisting 200 companies listed on the New York stock exchanges. Chinese regulators have instructed major accounting firms in the US to prepare to bring the audit paperwork of US-listed Chinese companies to Hong Kong.

Following these updates, shares of tech giants, along with Alibaba Group, JD.com, etc., increased. Other than these tech giants, stocks of companies like NetEase, Nio, and Li Auto surged up on their respective stock exchanges.

With these ongoing developments, let’s try to understand the impact of these updates on the Australian market. For this, let’s start with the stimulus package and the existing challenges in China, followed by the impact of the probable US and China deal.

China’s Stimulus package:

As pointed out above, China has announced a 1 trillion yuan stimulus package. This stimulus package aims to boost the real estate sector, strengthen sagging growth and create jobs. To boost the economy, the People’s Bank of China announced a 5-year loan prime rate reduction by 1.5 percentage points. The rate now stands at 4.2%. With this action, China aims to reduce the cost of borrowing and provide relief to its people.

The current problems in China:

Besides the global factors affecting the Chinese economy, China is currently impacted by three major problems. These include growing property crises, losses in high-speed railways, and the frequent COVID-19 lockdowns.

Housing crisis:

The real estate sector is a major contributor to the Chinese economy and is in the spotlight when the news came into the market that China had issued US$148 billion in loans to help property developers. Many Chinese borrowers have started revolting, and several people are declining to pay their mortgages. Many fear that they will not see their flats completed. On the other side, China’s banks also face mortgage losses as confidence in the Chinese real estate sector plunges. The spiralling crisis of stalled projects has impacted the spirit of home buyers. Thus, triggering a mortgage boycott across 90 cities in China.

Many economists and market experts fear possible broader systematic risk. Many believe that if the government does not help the developers complete the project, it could result in further losses.

COVID-19:

The COVID-19 pandemic has a significant role in the current slowdown in the Chinese economy. The country has experienced lockdowns now and then, which has hurt people’s lives and their jobs. Beijing is placing financial and social stability as its priorities. It has provided a grace period on mortgage payments and a central bank-backed fund to support developers.

By the end of March 2022, bad loans at lenders were nearly 2.9 trillion yuan. Experts believe this number will go up further and strain the economy, which is already running slower.

Railway Debt Crisis:

China’s railway debt crisis is another big challenge in the country. China’s long-distance high-speed rail, which was once profitable, is currently under huge debt of ~US$900 billion. This high-speed train has grabbed major attention from different corners of the world and is now heading towards a trillion-dollar disaster.

In 2021, China’s high-speed railway network covered 40,000 km and connected 93% of the cities across cities with more than 500K population. China aims to increase the network to 50,000 km by 2025.

However, the aim to achieve this objective has increased the liabilities of the state-run operators. The debt reached ~5.9 trillion Yuan. This sector was impacted largely during the pandemic due to the COVID-19 lockdown in China. Experts believe this number to increase. As a result, the concerns related to China’s hidden debt could take centre stage amid the existing pace of the Chinese economy.

Is US and China deal a sign of improvement?

Five big Chinese companies have recently indicated that they will voluntarily delist themselves from NYSE. These companies are:

· China Life Insurance Company

· PetroChina Company Limited

· China Petroleum & Chemical Corporation

· Aluminium Corporation of China Limited

· Sinopec Shanghai Petrochemical Company Limited

The ADR issued by these companies raised US$7.1 billion. China’s decision to delist these companies from NYSE is influenced by their refusal to obey US regulations. These companies form a part of the 8 NYSE-listed, national, state-owned enterprises for which China avoided sharing audited review data with the US Public Company Accounting Oversight Board because of national security reasons.

Many investors and market experts fear that the exit of these companies would open doors for big giants like Alibaba, JD.com, and other e-commerce companies. Alibaba’s market cap is over US$232 billion, and JD.com is over US$100 billion.

In case a company gets delisted, generally, institutional investors tend to abandon it. Many investors, sellers, and intermediaries may have to experience losses. It can lessen liquidity and result in a fall in share prices. Not only will it impact the US market, but it will also result in a reduction in the cash flow for the Chinese economy. Subsequently, the impact would be seen on various other stock markets.

The recent debate on the US and China deal has cheered investors, one of the factors driving the market this week.

Bottomline:

?The stimulus package has given investors some hope regarding possible recovery in the gradually slowing Chinese economy. The confidence was further strengthened when the news related to the deal between the US and China regarding the delisting of Chinese companies from the NYSE.

Still, many things are unclear about whether the deal will be finalised and the duration China will take to pace up.

Any positive development in the coming days would probably drive various stock exchanges across the world in the future. Many countries have trade relations with China. Hence any positive move will support the trade relations between the companies of these countries.

* Julie Vargas is a Financial Analyst at Kapitales Research, Australia.