Goldman Sachs cuts MSCI China earnings outlook to zero growth

In China, people usually buy apartments before they are completed. Pictured on June 28, 2022 are unfinished residences in Nanning, Guangxi Zhuang Autonomous Region.

Edition of the future | Edition of the future | Getty Images

BEIJING — Goldman Sachs has lowered its forecast for the MSCI China index due to the worsening crisis in the Chinese real estate market.

The investment bank cut its earnings outlook for the index to zero growth for the year, from 4% previously, according to a report released late Thursday.

Analysts also cut their MSCI China price target over the next 12 months to 81 from 84. MSCI China tracks more than 700 Chinese stocks listed globally, including Tencent, BYD and Industrial and Commercial Bank of China.

The index fell more than 6% in July alone, as concerns over China’s property market added to existing concerns over Covid, tech regulation and geopolitics.

The new lower target means there is another 18% upside from the index’s close of 68.81 on Friday, but it also means the index is likely to be down around 3% this year from at a slight gain.

Pressure on Chinese real estate

“Residential-led growth” for the Chinese economy is coming to an end, Henry Chin, head of research for Asia-Pacific at CBRE, said on CNBC’s “Squawk Box Asia” program on Monday.

He pointed to an underlying bifurcation in the market: housing demand returning to China’s biggest cities, but excess supply in smaller towns that could take “up to five years” for the market to be absorbed.

Real estate and related industries account for more than 25% of GDP in China, according to Moody’s.

Goldman’s real estate team cut expectations for new housing starts – a 33% year-on-year drop in the second half versus a previously forecast 25% drop.

Investment banking stock analysts expect state-owned property developers to outperform non-state-owned ones. Among Chinese stocks, Goldman favors sectors such as autos, internet retail and semiconductors, but remains cautious on banking stocks due to their exposure to housing-related loans.

Covid Overlook

Earlier this month, Goldman economists cut their forecast for China’s GDP to 3.3% from 4% previously. Economists cited “all unresolved Covid and housing issues as well as heightened risks to global demand and Chinese exports”.

China posted GDP growth of 0.4% in the second quarter from a year ago, bringing growth for the first half to 2.5%, well below the official target for the year whole by about 5.5%.

Investment in real estate in the first half of the year fell 5.4% from a year ago, worse than the 4% decline recorded in the first five months of the year.

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Nomura’s chief economist for China, Ting Lu, warned in a report on Friday that “the slowdown could be even worse than the data suggests” and noted that the real estate sector “has deteriorated beyond even our bearish expectations”.

“The Omicron outbreak and the March-May shutdowns have made the situation much worse, as the shutdowns have limited the purchasing power of Chinese households and reduced their appetite and ability to purchase new homes,” said Mr. Read.

While new Covid cases in China have reached several hundred a day, most infections have occurred in the central part of the country rather than the metropolises of Beijing and Shanghai.

Over the weekend, one of the hardest-hit areas, the city of Lanzhou, said the risk of disease transmission was under control.

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