“Our own expectation is that the policy tightening already under way will weigh on parts of the economy later in the year.
“But will not be sufficient to bring growth below target – or to begin a deleveraging process. Property, and as a consequence commodities, are likely to feel the impact first.”
Aviva Investors’ EMEA head Will Ballard suspects the prognosis is not good for Chinese financials or stocks in general.
“The first stage impact is that once the sovereign rating is downgraded, it is likely that most Chinese banks will have to be downgraded as well,” said Ballard.
“A rising cost of funding for the banks, unless it can be passed on, results in falling net interest margins. That in turn to the average equity investor, means lower earnings for banks stocks.
“Considering international investors are already having misgivings about investing in Chinese banks, with ICBC’s H shares trading on only 6x earnings, any fall in earnings is going to do nothing to help confidence.”
The credit downgrade, he argues, could reflect the fact that China is on an even slower path to growth for GDP than previously considered:
“Should that be the case, then again, future earnings of Chinese companies could be lower than investors expect. Lower growth and lower earnings normally mean lower valuations.”
However, Chinese valuations remain much lower than other emerging market counterparts, he pointed out.
