Don’t look now, but the world’s second-largest economy is slowing down and looks to be in trouble.
Slumping retail sales, crumbling exports, falling prices, and a real estate bust that never seems to end – the recent economic news out of China has been downright depressing.
It wasn’t supposed to be this way.
The end of China’s Zero COVID-19 policies and an easing of the country’s crackdown on technology firms were poised to reinvigorate the world’s second-largest economy.
Or so investors thought.
Investors pushed billions of dollars in Chinese ETFs last year thinking they were going higher, but instead, they’ve been one of the worst performers of 2023. Now shares are trading at levels last seen over a decade ago.
- The PBOC performed an emergency rate cut to its MLF (the lowest level since 2020) yesterday to help stimulate the economy, but equities sold off.
- China’s 10-year government bond yield has fallen and is now at its lowest level since the coronavirus outbreak in 2020.
- The government has warned investment funds to avoid being net sellers of Chinese stocks.
- The economy is experiencing DEFLATION. Consumer prices fell -0.3% year-over-year, which means they are likely to export that deflation to the rest of the world.
- The real estate sector is still a massive problem for China. This is highly significant because it is likely the largest asset class in the world.
- Country Garden, China’s second-largest real estate developer, is warning of a potential onshore bond default and is on the verge of collapse.
- Chinese shadow bank, Zhongrong International Trust Co, which manages $140 billion has missed payments on products because of liquidity problems. They are part of a $2.9 trillion shadow banking system.
- Many investment banks have downgraded their Chinese economic growth forecasts.
- New loans in July were the weakest since 2009. Homes prices fell in July, too.
- Exports AND imports are contracting.
- Their U.S treasury holdings are the lowest since 2009 and they are stockpiling gold and agricultural products like rice, wheat, maize, and soybeans.
- The government announced that it will no longer publish youth unemployment figures. The last report was a record 21.3% unemployed.
As China’s economy continues to disappoint, there is a sense China’s economic problems might be deeper than many had thought.
Richard Koo, Chief Economist at the Nomura Research Institute, has said China may be falling into a “balance sheet recession,” similar to the one that afflicted Japan in the 1990s.
According to him, in a balance sheet recession, people work to pay down debt that accumulated during a bubble, hurting economic growth for many years into the future.
In the case of China, the bubble was in real estate, a sector that accounts for more than a quarter of the country’s GDP.
Troubles at Chinese property developers like Evergrande Group and Country Garden have brought the vulnerability of China’s real estate sector to light and there doesn’t seem to be an easy solution to the crisis.
To be fair, no country is perfect and China does have a few things in its favor.
- 6.3% GDP Growth in China is better than 2.6% in the U.S.
- The Chinese government is turning more pro-business and will likely do more stimulus.
- Chinese stocks are extraordinarily cheap.
Trade weakness adds to downward pressure on their economy. Global consumer demand has weakened after the Federal Reserve and central banks in Europe and Asia raised interest rates to bring inflation down from near multi-decade highs by reining in business and consumer activity.
China has benefited by being the exporter of cheap goods worldwide, but that also made the country dependent upon ongoing export demand.
It was recently reported that China’s exports tumbled 12.4% in June. Exports to the U.S. tumbled 23.7% from a year earlier to $42.7 billion, a six-month low.
For now, China looks like a hard pass.
It’s the weakest sector in our proprietary Relative Strength matrix.
For investors who may be tempted to catch a falling knife, I would watch shares of China Construction Bank as a market barometer.
It is the 4th biggest Chinese company with exposure to many facets of the Chinese economy.
Remember, bottoms are a process, not an event, and right now, Chinese stocks are nowhere close to forming a bottom.
If you’d like to talk more about how to position yourself to be ready for the changing markets, you can schedule an appointment today with one of our experienced advisors who will guide you through our various adaptive investment models.
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