China to steady the ship in 2016

Posted by Anton Murray Consulting on 30 Sep, 2015

Taylee Lewis

In a recent report titled China’s policies and fundamentals coverage, AllianceBernstein (AB) said the growth of the domestic corporate bond market and recovering property fundamentals will contribute to China’s stabilisation.

According to the report, the trend is underpinned by Chinese government policy.

“The strategy is to rebalance the economy so that domestic consumption plays a greater role alongside the traditional growth engines of investment and heavy industry,” said the report.

“This requires a range of reforms to stimulate private investment (foreign and domestic) and more efficient pricing of capital, and the liberalisation of capital markets is a key step in the process.”

As a result, policy improvements have accounted for much of the growth in the corporate bond market, the report said.

“These developments have broad implications, as a bond market can help fuel economic growth and, from a balance-sheet risk-management perspective, lead to a more efficient matching of assets and liabilities.”

Moreover, AB noted that concerns relating to the property market have eased, as developers are now starting to worry about the availability of land.

“Although this points to an eventual recovery in supply-side activity, we don’t expect such a change to become apparent before the second quarter of next year.

“The period between now and then, and the availability of funds from the bond market, could prove restorative for the property sector, giving developers time to stabilise their margins and improve earnings while maintaining healthy balance sheets.”

The report concluded that the interrelatedness between corporate bond market and property sector trends is evidence that China’s reforms are starting to “synch” with economic fundamentals.

“The warnings in recent media and sell-side broker reports about the increasing downside risks to China’s economy – and the consequent negative implications for the global outlook – seem misplaced.

“We expect that, by the middle of next year, China’s growth may well have steadied and formed enough of a base for a rebound,” the report said.

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