BNP Paribas has revised its inflation forecasts upwards and continues to expect temporary price shocks to turn into a more persistent reflationary trend that will impact the near-term outlook for China’s economy.
“China’s growth slowdown, while sharper than we expected, has triggered a shift to a more supportive policy stance, so we think it will be short-lived,” Olivia Frieser, global head of markets 360 in BNP Paribas’s London Branch, said in a new research report.
Frieser said she was surprised by both the extent of the slowdown and the vigour of the authorities’ regulatory push, which has further clouded the outlook. But as with recent Covid-related concerns, she sees this more as a “bump in the road” than a game changer.
The fact that the slowdown has led to a policy shift towards a more supportive stance is expected to bear fruit, with the usual lags.
BNP Paribas said in its report that it had revised down its 2021 growth profile to reflect new mobility restrictions, arguably premature policy normalisation, the turnover of local political leadership ahead of the 20th Party congress and the regulatory changes that have weighed on markets over the past few months.
Promising over the medium term
However, the French financial group revisions its 2022 growth forecasts moderately higher and expects China’s GDP growth to comfortably exceed 5% in 2023.
“This reflects our view that a turnaround in growth policy at the Politburo economic meeting on 30 July is likely to increase fiscal support at the local level, with effects likely to be seen from the fourth quarter 2021 onwards,” Frieser said.
On the downside, exports – one of the key driving forces underlying the recovery – might suffer when output in competing countries normalises and there is renewed consumption in destination countries from goods to services.
In addition, regulatory changes and policy-induced deceleration in the property market could also prove to be more significant than the BNP Paribas base case.
On the upside, meanwhile, the 20th Party congress in October 2022 could announce a policy shift that is swifter and more effective in boosting activity. Frictions due to changes in local leadership might also be resolved sooner than expected, added BNP Paribas.
Further, if the China-US relationship moves from open conflict to a stalemate with some limited cooperation, the resulting reduction in uncertainty could rekindle foreign investment in China and boost private activity.
Optimising for Asian equities
BNP Paribas pointed out the steep valuation discount of Asian equities relative to developed markets, arguing that investment dollars deserve to be allocated to the former.
Manishi Raychaudhuri, head of Asia-Pacific equity research at BNP Paribas Securities, identified nine sectors at the intersection of undervaluation and under-ownership, mostly from North Asia.
One of the three sectors considered over-valued and over-owned is China technology, which BNP Paribas sees as a government policy beneficiary, possibly explaining investors’ fascination and the over-ownership
“In China, energy, industrials, materials and utilities appear to be the under-owned sectors on this basis, while technology and consumer staples appear over-owned. Both foreign and domestic institutional investors bought technology and consumer staples over the past five months,” Raychaudhuri said.
