High Growth and Bargain Prices? Don't Be Fooled by China

Chinese Communist Party (CCP) Premier Li Qiang took the big stage to give China’s 2024 GDP forecast yesterday…

And, all told, it was a disappointment.

It’s exactly what analysts were expecting: A hefty 5%, the same as 2023. On top of that, it’s fictious.

Keep in mind that U.S. GDP has exceeded 5% growth one time since 1984.

But still, optimism prevails.

This high growth target (target without a plan, of course) coupled with a three-year stock market downturn has investors far and wide believing that now’s the time to buy in. Everything’s a bargain when it’ll be worth tomorrow, right?

The problem is that we’re trying to build houses in the sand.

And navigating China's investment landscape in 2024 requires a discerning eye, especially given the complex dynamics of its real estate sector and broader economic challenges.

China Can’t Escape the Real Estate Woes

The country's ambitious 5% GDP growth target is juxtaposed against a backdrop of significant hurdles, particularly within the property market, which has historically been a cornerstone of economic activity.

China's real estate sector, which accounts for about 13% of the country's GDP – roughly $2.3 trillion - has seen better days.

The market is under pressure from high levels of unconstructed and delayed pre-sold homes, estimated at around 20 million units by the end of 2022. This has significantly dampened potential homebuyers' interest due to the extended waiting periods before moving into their new homes.

And it’s part of a much longer-term trend.

The slump in newly commenced real estate projects puts China on track for a record three consecutive years of negative growth in property construction, with investment in the sector falling by 8% year-on-year for through last November.

It’s probably no coincidence that the stock downturn coincides with negative property construction growth.

These developments underscore the sector's pronounced impact on the overall economic landscape and highlight the risks associated with investment in the current climate​​.

Developer Issues Abound

The funding models previously favored by private firms in China's property sector, which involved raising substantial debt in offshore bond markets, have also become untenable.

Essentially, demand from the big international investors is dwindling.

And as a result, the state-owned firms' share of total property sales has increased, reflecting a shift in the market's dynamics.

This adjustment, along with the sector's leverage expected to rise to close to 5x between 2023 and 2025, indicates a challenging road ahead for developers.

The government has intervened with measures to reignite the sector, including cutting down payments and mortgage interest rates. However, sales are expected to continue their decline into 2024, with S&P Global Ratings estimating a further 5% drop in property sales​​.

What’s more, new home prices in China have shown some signs of recovery, with the fastest monthly pace in nearly 2.5 years and an end to a 23-month slump in government land sales.

These developments hint at a possible slowing in the decline of the property sector, bolstered by recent policies aimed at supporting the real estate market.

Bottom Line

This said, the extent and sustainability of this recovery remain uncertain, as the sector ended the previous year with significant declines in new home prices and investment. Major cities have begun easing home-buying curbs, which could influence market dynamics in the near term​​.

For investors, this presents a nuanced picture.

While there may be opportunities within this complexity, the overriding message is one of caution.

Yesterday, in fact, Goldman Sachs’ Wealth Management CIO came out and told investors not to invest in China right now.

And he’s right.

The combination of ambitious GDP growth targets, the significant role of real estate in the economy, and the government's interventionist measures underscore the importance of thorough due diligence and a strategic approach to investing in China's current economic environment.

Right now, things don’t look so great. And with much more money to be made elsewhere, your money is best kept there instead.

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