Goldman Sachs cuts MSCI China profit forecast to zero growth

BEIJING – Goldman Sachs lowered its forecast for the MSCI China index due to the deteriorating real estate market in China.

The investment bank cut its forecast for index earnings to zero growth for this year, down from 4% previously, according to a report published late Thursday.

Analysts also lowered MSCI China’s next 12-month price target to 81, down from 84. MSCI China tracks more than 700 listed Chinese stocks 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 about Covid, technology regulation and geopolitics.

The new lowered target means that there is another 18% rally from the index’s close of 68.81 on Friday, but it also means that the index is expected to fall by about 3% this year against a moderate gain.

The “housing-led growth” of the Chinese economy is coming to an end, Henry Chen, head of research for Asia Pacific at CBRE, said Monday on CNBC’s “Squawk Boxes Asia.”

He noted a fundamental bifurcation of the market: housing demand is returning in China’s largest cities, but an oversupply in smaller cities could take “up to five years” to absorb the market.

Real estate and allied industries account for more than 25% of China’s gross domestic product, according to Moody’s.

Goldman’s real estate team lowered its forecast for new housing starts – a 33% annual decline in the second half of the year versus a previously expected drop of 25%.

Equity analysts at the investment bank expect state-owned property developers to outperform non-state-owned ones. Within Chinese stocks, Goldman favors sectors such as autos, online retail and semiconductors, but is cautious about bank stocks due to its exposure to housing-related loans.

Earlier this month, Goldman economists lowered their forecast for China’s gross domestic product to 3.3%, down from 4%. Economists cited “all the outstanding problems with Covid and housing as well as the rising risks in global demand and Chinese exports.”

China reported 0.4% GDP growth in the second quarter of last year, taking growth for the first half of the year to 2.5% – well below the official full-year target of around 5.5%.

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

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

“The Omicron outbreak and lockdowns from March to May materially exacerbated the situation, as the lockdowns limited the purchasing power of Chinese families and reduced their appetite and ability to buy new homes,” Lu said.

While new COVID-19 cases in China have risen to several hundred per day, most infections have been in the central part of the country rather than the capitals of Beijing and Shanghai.

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