In this edition of Pinpoint Podspective, we summarize our China macro outlook as presented in our Q1 2024 investor quarterly call, along with an analysis of the latest State Council guidelines regarding China’s capital markets.

Green Shoots

China’s Q1 GDP growth, at 5.3%, surprised on the upside. Many sell-side economists lifted their full-year GDP forecast to be at or closer to 5%, a target level set by Beijing last year and reaffirmed at the Party’s Two Sessions in March.

On the demand front, the three key drivers of the economy – Investment, Consumption, and Foreign Trade - all displayed signs of stability. Investment in Infrastructure grew by 6.5% YoY, while Investment in Manufacturing surged by 9.9%. However, the property sector continued to be the weakest link. Property Investment in Q1 fell by 9.5% YoY. New home sales for the quarter was down by 19.4% and 27.6% in quantity and value, respectively. That said, in recent weeks the luxury real estate market in Shanghai has seen several new developments sell out on their debut.

Data Source: Wind, Bloomberg & Pinpoint

Quality over Quantity?

Although the lingering effects of a housing crisis may continue to impact both government and private spending, recent economic indicators suggest a degree of resilience.

China's economy is currently undergoing a transition away from a debt-driven, real estate-dominated model towards one that prioritizes manufacturing and consumption. While this transition may entail challenges and pains, it is anticipated to result in a healthier mix and more sustainable growth trajectory. Chinese manufacturing is poised to maintain its competitive edge, leveraging advantages such as scale, relatively lower labor costs, strong government support, technological expertise, and well-established infrastructure developed over the preceding decades. The chart below shows bank lending trends, reflecting a notable increase in funding directed towards manufacturing compared to the real estate sector.

Data Source: CICC & Pinpoint

New Capital Market Regulations

On Apri 12th China’s State Council issued guildlines aimed at bostering regulations of its capital market, covering nine areas and thus dubbed “the nine-point guidelines”. This is the third iteration of such“nine-point guidelines”, with the previous two, in 2004 and 2014 respectively, preceding periods of stock market bull runs. It remains to be seen how this latest iteration will unfold.

The detailed interpretation of the new guidelines has been extensively covered by the street. Our initial assessment indicates that once implemented, the guidelines will tighten regulations surrounding IPO listings and delistings, mandate cash dividend payments by listed firms that meet certain earnings and revenue thresholds, and curb certain quantitative investment strategies.

In the long term, these guidelines are expected to foster a healthier stock market environment by enhancing liquidity and favoring higher quality companies. Thus far, policymakers have been walking the talk. For example, Central Huijin, China’s major sovereign wealth fund, purchased over RMB 300 billion worth of blue-chip CSI 300 ETFs in the first three months of this year.