We are in the year of the Rabbit, which for China’s CSI 300 equity index has not been especially auspicious. The index has dropped 6.4% year-to-date, amid extreme negativity from global investors. The property market is depressed, Xi Jinping is steering towards increased socialism, and the post-Covid recovery has fizzled. Jinping cemented his leadership for an unprecedented third 5-year term last year. His most controversial policies include crackdowns on the private sector, in particular internet, gaming, and online education. He has also forced the deleveraging of China’s all-important property sector, which comprises an estimated 74% of household wealth. The policy has burst China’s property bubble. The pre-financing model used by property developers, which required prices to keep rising, has been broken. Property developers have been going insolvent, starting with the giant, Evergrande two years ago, and most recently Country Garden, the largest in the private sector with about $200 billion in liabilities is struggling to survive.

It is ironic that foreign investors have been clamouring for years for a restructuring of China’s economy away from its dependence on property and infrastructure investment spending. Now that it is happening, there appears to be little applause despite the obvious tilt to a more sustainable consumer led economy. Foreign investors have been pulling out of China at a record pace. Yes, the property market is depressed. Housing sales are 22% down from last year and new housing starts down by 29%, while the inventory of unsold homes is at an all-time high, signalling a long adjustment ahead. Yet, property prices have not crashed. They are only 5-10% below their peak and while new home sales have collapsed, existing home sales are only down by 10-15%. The deleveraging of China’s property sector is far more controlled and less damaging than the US property crisis in 2008/09.

With the property sector in the doldrums, which traditionally comprises 25% of GDP it is no surprise the post-Covid recovery has been weaker than expected. Exports, key to China’s growth, have also contributed little due to weakening global demand. This is a cyclical factor beyond China’s control. Meanwhile domestic industrial and consumer demand is showing signs of picking-up. Official manufacturing and services purchasing managers’ indices (PMIs) gained ground in their August readings: Manufacturing from 49.7 to 50.2, above the expansionary 50 level for the first time since March and Services from 51 to 51.7. Both the official and independent composite PMIs, comprising all economic sectors, have been in expansionary mode for nine successive months. GDP growth is on track to meet the government’s 5% target in 2023. Next year’s growth is expected to slow as the country continues to adjust to a more sustainable consumer led growth model. The World Bank and IMF forecast growth of 4.4% and 4.2% respectively in 2024, far slower than in previous years but nonetheless solid in the global context.

The greatest hindrance to investor sentiment must be government’s ideological pivot from market-oriented growth to the “common prosperity” and increasingly isolated “new whole-nation system.” Government’s private sector crackdowns have undermined domestic business and consumer confidence, as well as foreign investor sentiment. It is clear though that Beijing cares very much about economic growth and like previous governments will not be too proud to admit past mistakes. Independent research firm Alpine Macro reminds us that “The Communist Party has engineered massive directional changes in its ideologies throughout history. Beijing is aware of the damage to the private sector and has been trying to revive business confidence. It is premature to conclude that the current left turn is permanent.” Deng Xiaoping’s famed “southern tour” in 1992 and Jiang Zemin’s “Three Represents” theory in 2000 are key examples of policy adjustments that unleashed dramatic growth.

Xi Jinping’s government is quietly promoting the stock market as an alternative source of wealth for households. There has long been a negative correlation between the performance of property prices and the performance of the stock market. They have rarely performed well at the same time but as one declines the other tends to pick up the slack. They have traditionally been competing asset classes. With property accounting for 74% of household wealth, above any other country in the world (US:52%), and financial assets making up only 11% of household wealth compared with an average of 30% or more in other countries, there is scope for a significant pendulum swing. There have been 200 new listings on the Shanghai Stock Exchange this year, with particular focus on new economy sectors, including semiconductors, biotech and electric vehicles, hi-tech manufacturing, and renewables.

China is already a global leader in Artificial Intelligence. AI is set to have a transformative effect on economic growth with the benefit of enhanced productivity. Today, Chinese technology giant Baidu unveiled the newest version of its generative AI model, Ernie 4.0, claiming that its capabilities are equal to those of ChatGPT’s latest model. Meanwhile, China’s renewable energy and Electric Vehicle markets are booming. China is the undisputed leader in the EV market representing 60% of global sales. 30% of the cars on China’s roads are EV.

It is often worth considering a contrarian investment position, especially when there is such overwhelming negativity. Alpine Macro says “Recall lessons of the late 1990s Asian crisis: panic produces the best bargains long before the crisis ends… The best bargains were available in the first year of the crisis, 1997.” As the year of the Rabbit ends on 9th February, the year of the Dragon, the rarest and most auspicious of all Chinese zodiac signs will be expected to usher in a period of luck, success, and good fortune.