[Good Morning Stock Market] Strong Chinese Economic Indicators... "Brazil Benefits from Increased Raw Material Imports"

Chinese President Xi Jinping is inspecting the automobile parts and mold industrial complex in Ningbo, Zhejiang Province, last March. (Photo by Yonhap News)

[Asia Economy Reporter Kum Boryeong] Recently, major economic indicators in China have been showing signs of improvement. Analysts suggest that China's demand recovery is becoming visible. In the case of retail sales, the improvement in consumer sentiment during the October National Day holiday is expected to serve as a recovery momentum for consumption indicators. Brazil has been identified as a country benefiting from the increase in China's raw material imports.

◆ Yoon Seonghee, Hyundai Motor Securities Researcher = Following August, major economic indicators in China showed positive trends in September as well. Retail sales in September increased by 3.3% year-on-year, surpassing the forecast (1.6%) and surprising the market. Retail sales excluding automobiles (YoY) also turned positive in September, continuing the improvement. Among retail sales subcategories, consumer goods such as beverages, alcoholic beverages and tobacco, and cosmetics led the increase. Following the surprising retail sales in September, China's retail sales are expected to continue their recovery momentum due to improved consumer sentiment during the October National Day holiday.

Industrial production (YoY) in September also showed a surprise by growing 6.9%, exceeding the forecast of 5.8%. Specifically, automobile manufacturing and electrical machinery and equipment manufacturing increased by 16.4% and 15.9%, respectively, showing improvement compared to the previous month as well. The electrical machinery and equipment sector is linked to the trend of South Korea's export growth rate, which is expected to act as a positive factor for export improvement.

China's rapid control of the novel coronavirus (COVID-19) and the relatively stable number of additional confirmed cases after the Singles' Day have confirmed continuous fundamental improvements through major economic indicators. Compared to other countries, China's quick epidemic control has led to a stronger rebound in leading economic indicators compared to the United States. As a result, long-term bond yields in China have been continuously rising.

If long-term bond yields continue to rise, the associated debt burden may increase. Therefore, a point to keep in mind with ongoing interest rate hikes is the potential emergence of high-yield risks amid rising non-performing loans (NPLs). The occurrence of high-yield risks during a period of increasing NPLs could raise the risk of bank insolvency, requiring caution.

Chinese real estate developers account for about 50% of Asia's high-yield issuance volume, representing a significant portion. According to ANZ Research estimates, regional bonds worth $77.46 billion and offshore dollar bonds worth $50 billion are approaching maturity in 2021, which are 16% and 47% higher amounts than this year, respectively. Recently, news spread online that Evergrande, the largest real estate company in China, experienced liquidity tightening, raising concerns about the debt repayment ability of real estate developers. Additionally, the Chinese government plans to control loan costs by setting debt ratios related to cash flow, asset size, and capital levels of real estate companies, which could pose challenges for debt rollover next year.

Therefore, it is judged necessary to approach investments in the real estate sector cautiously, and if real estate debt repayment issues become more prominent, it could negatively affect the trend of NPLs in Chinese banks, which is a risk to keep in mind.

◆ Min Byungkyu, Yuanta Securities Researcher = Future stock market momentum is expected to be stronger in countries related to raw materials that are influenced by Chinese demand. Although the recovery of China's economy and stock market began from the first quarter as a bottom, the recovery of import indicators centered on raw materials has only recently started.

Recent data shows that China's imports in September increased by 13.2% year-on-year, with steel product imports rising by 62.7% and copper imports by 74.1% compared to the previous year.

Metal prices, which have a high demand share in China, are also showing a recovery trend surpassing pre-COVID-19 levels. This year, iron ore has recorded a 30% return since the beginning of the year, and copper is showing momentum reaching its highest level since June 2018.

Among countries, Brazil is clearly benefiting from China's recovery. Brazil is considered a representative country that failed in epidemic control, ranking second worldwide in COVID-19 deaths (155,000) and third in confirmed cases (5.3 million), but its economic recovery is progressing rapidly.

As of September, Brazil's manufacturing PMI rose to 64.9, the highest among 25 countries with available data and the highest level since February 2006.

Looking at Brazil's export status by item, shipments of iron ore and copper are increasing, and regionally, exports to China are surging. It appears that Brazil's recovery is influenced by China's recovery, which accounts for 32.3% of Brazil's total exports.