Lombard Odier’s , published on 24 July, includes an overview of China’s economic activity and growth following its post-covid reopening. In its paper, the bank noted that it expects to see the country’s leadership launch a pro-growth package and additional stimulus this month. Chief economist Samy Chaar sat down with Delano to give more insight into Lombard Odier’s market outlook.
Reopening effect did play out
Lombard Odier’s new paper aims “to make an assessment of what’s happening in China,” explained Chaar. “The starting point has obviously to do with growth.”
“The key point here is that many have been disappointed by the current level of economic activity in China,” he said, but added that growth has indeed been observed in the country. “That’s a key part of the story. When you look at different economic indicators, whether high-frequency or traditional indicators, we’ve basically erased the covid factor. So the reopening factor actually played out: if you look at consumption, if you look at mobility, we are back to pre-covid levels.”
But no “revenge spending”
That being said, this reopening effect is now over, said Chaar. “The second point is that Chinese consumers are in deleveraging mode. We see that very clearly. If you think about what happened when it comes to consumption in Europe and the US, we basically had the reopening factor. And then we had another factor, which is that consumers jumped on their excess savings, consumed services, went to restaurants; there was this hunger for holidays.”
We’re missing the second factor, which is an enthusiasm to consume these excess savings.
This is not seen in China. There was the reopening factor, but “we’re missing the second factor, which is an enthusiasm to consume these excess savings--we’ve called that ‘revenge spending’ in Europe and in the US,” said Chaar. “Now we’re missing a new growth story, because Chinese consumers are in some sort of deleveraging mode.”
Lessons to learn from Europe’s “austerity” era
China’s current deleveraging mode is similar to what happened in Europe and the US after the 2008 financial crisis and the 2011 sovereign debt crisis. If any lessons can be drawn from this era, “it’s that austerity didn’t do any good,” said Chaar. “So if China doesn’t want to repeat the European mistakes of the post-2011 sovereign crisis, they shouldn’t be too measured.”
China should be on the risk-taking side, rather than on the too-cautious side.
“The Americans took more risks and that benefitted them. We saw a growth divergence,” said Chaar. “And that, I think, has a lot to do with the austerity that we saw in Europe. So if that is any guide, China should be on the risk-taking side, rather than on the too-cautious side.”
So where could this new “growth story” come from?
China’s reopening story is now behind us, argued Chaar. “So it’s basically all about the stimulus, when it comes to what the authorities will or will not be able to deliver.”
The chief economist focused on two aspects of the Chinese government’s expected stimulus: its size and its characteristics. “When it comes to the stimulus--and therefore the new growth story that investors can build or jump onto--it obviously has to do with volume. So the size of the stimulus is obviously important. Are they going to be ambitious or not?”
But it’s not only the size that’s important, said Chaar. The characteristics of the stimulus are also key. “What is it going to target, and how? Is it going to target--as usual, when it comes to China--the supply side?” This would be a bit of a disappointment, said Chaar. The country doesn’t need stimulus for its supply side--it’s had that for the past 15 years.
What it really needs to do is stimulate the demand side of the economy, he argued. But it’s not easy to do so. This would involve income transfers to consumers and some form of “social stabilisers,” such as retirement plans or unemployment benefits, in order to make consumers feel more comfortable about consuming their savings, said Chaar.
“Real need to support demand”
“There seems to be some commitment to do something. But again, it’s a bit vague,” Chaar said. The Politburo, the executive committee of China’s communist party, which met on 24 July, has issued some “relatively vague” press releases. Following these “vague” press releases, Chaar mentioned that he hoped to see specific policies as to how the government “intends to target and stabilise the real estate sector.”
“For now, I would say there is a promise, there is a feel that the authorities understand the urgency of supporting the recovery,” said Chaar. “I think they also understand that they need to work on the demand side more than on the supply side.”
There’s a real need to support demand.
However, in terms of creating “economic momentum” or supporting the economy, “there’s nothing like what the Americans are able to do,” said Chaar. “When you look at Europeans, Japan, China--they’re always very balanced. You know, they make, kind of, small steps. We’re not seeing the kind of ambition that only the Americans are able to deliver when it comes to supporting the economy.”
“We would have expected something more bold, a bit more-risk taking attitude from the Chinese authorities, but obviously, they’re being very measured. They’re worried about their excess of leverage in the housing sector, so they don’t want to fuel that, but then again--there’s a real need to support demand.”
Underweight on Chinese sovereign debt, currency
In terms of asset allocation, Lombard Odier “remains underweight on Chinese sovereign debt” and underweight on its currency, said Chaar, while Chinese “equity positions have to be reviewed.”
“I think we should still give the benefit of the doubt to the authorities this week [editor’s note: this interview took place on 26 July], and how they can precise what they mean with their first announcement, but basically, Chinese equity positions should basically be under review.”
Geopolitical considerations
Recently, the European Commission has been talking about its “de-risking” approach towards China, and diplomatic scuffles around the supply of rare metals--in particular, gallium and germanium--have also been in the news following China’s export restrictions. Does this have any impact on the market outlook?
A “complicated geopolitical context” could actually force the Chinese authorities to do even more, said Chaar. “I think there is a geopolitical transition at play, there is a bloc logic at play,” he said. “We’re going to see more cooperation within the blocs, but less cooperation between the blocs.”