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11 WORLD 7.9.2023 "A prolonged delay in policy support and market reform will likely endan- ger the outlook for China in 2024 and beyond." Whether the risk of more pro- nounced deflationary pressure could deepen, PIMCO's Wilding adds that adequate fiscal stimulus to boost domestic demand may reaccelerate inflation, while delayed or inade- quate policy measures could lead to a downward spiral. T Rowe's Kushlis, who looks at the impact on currency and fixed income, believes more stimulus, including additional interest rate cuts and in- creased fiscal spending, is needed. Otherwise, the Renminbi will con- tinue to face depreciation pressures from the global U.S. dollar strength, given high front-end U.S. yields rel- ative to lower yields in China. This is despite the authorities' efforts to manage the pace of this pressure through a range of active measures in the currency market, he says. Deal: betting on a policy- driven rally… Matt Wacher, chief investment of- ficer for Asia Pacific at Morningstar Investment Management, says invest- ments take more than economic indi- cators. "There's a downturn and there's no denying that. Being an effectively state-controlled economy where the government has a number of leads that they can pull, I don't think it will go into a Japan-type scenario, even despite the demographic headwinds." Wacher continues: "We tend to look through the cycles, so we don't think that this situation in China is going to last forever. We think that if you look through the cycle some of the valua- tions particularly in China itself are quite compelling at this point in time. He continues: "Countries like the US, I think that they're going to be less affected by what goes on in China these days as the US has a much larg- er economy than both Australia and Brazil for that matter, a much more diversified economy… So just because it's not going to be affected as much by a Chinese downturn doesn't mean that it's an opportunity like we don't think you should go and invest heav- ily in the US. But, because we think that there's valuation risk there, espe- cially in parts of the market that have rallied very hard this year. In terms of valuation, Wacher says: "Now is a good time to invest in Chi- na and that's certainly what we've been doing. We don't have huge po- sitions, but we have reasonably good exposure." …Or no deal: should you bet against china? The aftermath of the anticipated support remains to be monitored, says Gary Ng, senior economist for Asia-Pacific thematic research at Natixis CIB. Ng says investors, especially those betting on a policy-driven stock ral- ly, should keep expectations in check with the accommodative policies, de- spite signs of the government's will- ingness to stabilise growth. Ng says: "The market should not be over-optimistic about the size. It means it is unlikely to see any signif- icant boost to corporate profits and household income. There are more sectors with green shoots, such as electric vehicles, green energy, and tech, but they are not big enough to offset the drag from real estate." BNY Mellon IM's Mitra tells Morn- ingstar that the firm has taken a neu- tral position on Chinese equities be- fore further policy stimulus from the Chinese authorities is announced and launched. The risk could be capped as the market widely expected such a downturn. "In this backdrop, it is difficult to foresee how things much worse unless the growth outlook ma- terially deteriorates from here – say to below 4% year on year, which is not our base case. In a similar vein, the price of commodities likely already reflects the weakened state of Chi- nese fixed asset investment." He continues: "We suggest staying neutral on Chinese equities which remain too cheap to short and too weak to go long and are likely to pro- vide a hedge against elevated and ris- ing rates in the G3 markets (the U.S., eurozone, and Japan), and recession risks in several pockets of the devel- oped world. Don't forget fixed income Turning to fixed income, T Rowe's Kushlis believes that despite the eco- nomic hardship, China is avoiding a "balance sheet recession" as end bor- rowers are not facing debt servicing constraints. Interest rate cuts are keeping mortgage and local govern- ment debt sustainable. He likes Chinese local currency gov- ernment bonds. He thinks these as- sets as attractive given falling yields. He expects yields to remain low or fall further as the People's Bank of China continues cutting rates to support the economy. The policy response is ex- pected to be more supportive through incremental measures. downturn could mean for the rest of the world As the backdrop remains deflationary for China, economists say the next catalyst that they think is pertinent to kickstarting the economy is policy stimulus

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