China’s recovery will only last so long: Aviva

Aviva Investors has warned investors to remain alert of a Chinese economic slowdown, despite market commentary pointing towards growth of more than five per cent.

China has signalled it is looking to stimulate spending and investment after a tight few years with COVID-19 lockdowns, with Aviva Investors’ Senior Multi-Asset and Macro Strategist, David Nowakowski, forecasting growth of 5.6 per cent or higher.

Commentators also believe the Chinese government will focus on trying to increase household consumption and types of infrastructure investment after being suppressed due to strict pandemic lockdowns, but the solutions have not yet been confirmed.

“The first-quarter numbers are pretty much guaranteed to be impressive. Just returning to a normal trajectory means you get very strong short-term growth, maybe as much as ten per cent annualised,” Nowakowski said.

“The improved outlook has propelled Chinese equities sharply higher. The MSCI China Index, having slumped to its lowest level in more than a decade at the end of October, had within the space of three months surged 60 per cent in local-currency terms,” Aviva Investors’ report said.

Nowakowski also said that despite signals of “rapid recovery in activity” investors should also look ahead to the second half of the year, in which Chinese trend economic growth is expected to slump.

“I think the real question is once you get that v-shaped rebound, what’s the trajectory that follows? Looking ahead to next year, growth might be closer to four per cent than people expect,” he said.

Nowakowski credited the “ongoing weakness in the property sector” as one of the key drivers behind this slowing trend, after the nation experienced a “property market crash” leaving it with “slim prospect of… resuming its role as the primary engine of [China’s] economic expansion”.

“Unlike the previous two deep economic slowdowns, the government is unlikely to look to the property sector to reinvigorate growth as it is not productive enough,” he said.

The strategist also highlighted how the lifting of lockdowns has led to a recovery in economic activity beyond China’s own borders considering its close proximity to other countries, with outbound Chinese tourism possibly putting more pressure on inflation in western economies.

“Lots of Chinese people, especially among the middle class, have not been able to get out since the pandemic. Any recovery in Chinese tourism is likely to have a pretty big impact on leisure and hospitality businesses in many countries,” he said.