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INVESTORS CIRCLE BACK TO CHINA
In June, investors put more than $6 billion into 20 international funds focused on Chinese stocks, more than in any month since early 2021, according to Morningstar.
Investors are betting on signs that China’s crackdown on its tech sector may be easing and that the worst of the country’s property development crisis is past.
The MSCI China Index crashed to a five-year low in March but has since rebounded slightly, although it remains 14 percent below this year’s opening price. NASDAQ’s Golden Dragon China Index is off 16 percent, year to date.
Many investors are still recovering from the past 12 months, in which Chinese listed companies shed more than $3 trillion in value after harsh regulatory regimes were imposed on tech and financial firms, anti-COVID lockdowns froze the economy, and China’s close ties with Russia during its Ukraine war caused jitters.
China also banned for-profit tutoring, erasing what had been a significant economic sector, and prominent property developers defaulted on their foreign bonds, as we reported in a series of articles:
- “China’s Real Estate Market Teeters on Evergrande’s Debt” (21 Sep 2021)
- “China’s Real Estate Troubles Ripple Across Emerging Markets” (26 Oct 2021)
- “China’s Real Estate Crisis Grows” (9 Nov 2021)
- “China May Break Up Troubled Real Estate Giant” (1 Feb 2022)
As a measure of investors’ angst, a range of Chinese stocks gave ground early last week as the government imposed small fines on Alibaba and Tencent, two of the country’s most prominent Internet businesses.
Shares of Alibaba, considered the Chinese tech industry’s bellwether stock, fell 11 percent in value on 11 and 12 July.
“There are still several uncertainties lingering in investors’ minds, but we’ve come off rock bottom in terms of confidence,” Tommie Fang, UBS’s chief of China markets, said to The Wall Street Journal.
Some portfolio managers are cautiously picking up stocks they see as bargains, while others are waiting to see a clearer shift in the government’s regulatory behavior and whether snap anti-COVID lockdowns are truly over, the WSJ said.
TREND FORECAST: The U.S. and the dollar remain investors’ safe haven in a chaotic world economy, but China will remain the venue of choice for growth: China holds almost a fifth of the world’s consumers and its export manufacturing sector is second to none.
Of equal importance, the business of China is business, as we have often said. Projecting military might and engaging in geopolitical adventures is secondary.
In contrast, the U.S. often entangles itself in other countries’ military conflicts and seeks to enter into the politics of foreign nations to a greater extent than China does.
China has learned that the greatest geopolitical weapon is not bombs or bullets but trade and mutually advantageous economic ties.
CHINA EXPORTS 17.9 PERCENT MORE IN JUNE
China’s exports rose 17.9 percent in June, year on year, adding to the 16.9-percent gain in May, the General Administration of Customs reported.
Analysts had forecast a 12-percent increase.
As a result, China’s June trade surplus climbed to $97.94 billion for the month, up significantly from both May’s $78.8 billion and the $76.9 billion economists had expected, The Wall Street Journal noted.
The strong numbers indicate not only that China’s manufacturing industry has bounded back from a nationwide series of anti-COVID lockdowns in the spring, but also that supply chains are untangling.
Goods shipped to the U.S. increased at an annual rate of 19.3 percent; May’s increase was 15.8 percent. Exports to other Asian nations also strengthened.
China sent only 1 percent more goods to Europe last month than in June 2021, a quarter of the 4.1-percent expansion in May. The continent’s economies were burdened by soaring fuel prices and hobbled by a lack of food and manufactured goods coming from Ukraine.
Despite the strong June export report, analysts expect China no longer can meet its 5.5-percent growth target for 2022 that president Xi Jinping set last year.
TREND FORECAST: While exports pulled China out of its COVID War economic slump in 2020, as the global economy slows down, so too will China’s exports.
However, as the dollar gets stronger and the Chinese yuan get weaker, American businesses can buy more from China with less money, thus boosting their sales.
On the downside, U.S. companies that export to China will see their profit margins shrink as it costs the Chinese more money to buy less.
TRENDPOST: We noted over a year ago in “Trade War? U.S. Lost It” (9 Feb 2021) that Trump’s trade deal with China would fail to produce the results that it promised.
“The Trump administration never had a feasible plan for reducing the trade deficit,” Mary Lovely, senior fellow at the Peterson Institute for International Economics, told Politico then. “The 2017 tax cut ensured that the U.S… would continue to spend more than it produced, hence the… deficit.”
Regardless of the trade deal’s intentions, the COVID economy’s shutdown around the world de facto guaranteed that the U.S., like other nations, would ramp up purchases from China to make up for goods we were no longer making at home.
TREND FORECAST: The world will continue to depend on Chinese factories, although to a lesser extent than it has. Inflation will force more households to curtail their purchases which will cause nations to gradually slow the rate of increase in their imports.
CHINA’S ECONOMY BARELY BUDGES IN SECOND QUARTER
Despite a leap in exports in June (see “China Exports 17.9 Percent More in June” in this issue), China’s overall economy managed to expand by just 0.4 percent in this year’s second quarter, the slowest quarterly pace in two years, Bloomberg reported.
The period spanned a two-month lockdown of more than 325 million people in at least 46 major metro areas, including key manufacturing centers and the port of Shanghai.
Analysts had expected a 1.2-percent gain, following the first quarter’s 4.8-percent expansion.
The quarterly performance was China’s second worst in 30 years, following the plunge at the beginning of the worldwide COVID infestation.
China’s trivial economic gain in the quarter is a gauge of the impact on the global economy of president Xi Jinping’s draconian “zero tolerance” anti-COVID policies.
Due largely to the lockdowns, the services sector, which accounts for more than half of the country’s GDP, contracted 0.4 percent for the quarter.
Unemployment among people aged 24 and younger notched a new record of 19.3 percent in June.
Recently, Xi publicly recommitted to his drastic anti-COVID policy, raising the prospect of future snap lockdowns as the virus’s family of “Ba” variants picks up pace around the world.
Because of the policy, China “won’t make much of a contribution” to global demand this year, economist Chen Long at the Beijing consulting firm Plenum told Bloomberg.
“The base case is for more Beijing-style ‘soft’ lockdowns,” he said. “Factories will run and trucks will be able to drive, so the industrial side will hold up well but consumption will be limited.”
The quarter’s anemic performance virtually guarantees China will be unable to meet its 2022 growth target of 5.5 percent, Bloomberg noted, itself the most modest goal in 30 years.
Saving jobs, not growing the economy, will become the government’s new priority, analysts predicted to Bloomberg.
China’s GDP grew by just 2.5 percent this year through June, so “this year’s 5.5-percent growth is out of the water,” Wei Yao, chief Asia economist at Société Générale, said in a Bloomberg television interview.
The economy would need “a very, very strong recovery in the second half to hit 4 percent this year,” she noted.
However, an estimated 247 million people in 31 metro areas remain under some form of restricted activity, Nomura reported.
“The foundation for sustained economic recovery is not stable,” the National Bureau of Statistics said in a statement accompanying the quarterly figures, warning of “rising stagflation risks” in the world economy.
Dim Hopes
Following growth of just 0.4 percent in this year’s second quarter, hopes for a strong Chinese economy in the next six months have dimmed, The Wall Street Journal reported.
Consumer spending has stalled. The property development industry remains in crisis. Businesses are reluctant to invest for fear of new surprise lockdowns. A slowing global economy bodes ill for China’s export industry, which has buoyed the country’s financial performance for years.
As a result, banks have trimmed their forecasts for China’s 2022 economic performance.
The country’s GDP will grow by 3.1 percent this year, Barclays said, paring its previous prediction of 3.3 percent. Société Générale was less generous, chopping its outlook from 4.1 percent to 2.7 for 2022.
China’s sluggish economy is sending ripples through emerging nations, which have depended on income from selling timber, metals, and other raw materials to the industrial powerhouse.
If China cuts its purchases, the chances rise that many of those countries will default on foreign debts, fail to meet public needs, and undergo social and political turmoil, as we predicted in our New World Disorder top trend.
“Headwinds are considerable” in China’s manufacturing sector, mining giant Rio Tinto said of one of its largest customers in a report to shareholders last week.
Economic torpor is prompting Chinese citizens to hoard cash, the WSJ said.
Almost 60 percent of adults are more willing to save now than in the past, according to a poll by the People’s Bank of China, the largest proportion in 20 years.
TREND FORECAST: The Chinese zero COVID policy has crippled its “dual circulation” economic policy, which seeks to balance a strong manufacturing and export economy with robust consumer spending.
We have detailed the policy in “China Announces “Dual Circulation” Economic Policy” (9 Sep 2020), “Self-Sufficient Economy” (30 Nov 2021), and “China’s Economy is Shrinking” (10 May 2022), among others.
During the COVID War, China’s consumers were especially tight-fisted. With prices rising and the world’s economy running out of steam, they are even less likely now to spend freely.
Dual circulation will remain a goal, but it will not begin to be realized until the COVID virus is no longer causing periodic paralysis to China’s economy.
Beijing already has fallen back on its long-standing prop of public works construction to push the economy through hard times.
As a result, China’s goal of becoming the world’s largest economy will be delayed beyond its self-imposed goal of 2030.
CHINESE HOME BUYERS REFUSE TO MAKE MORTGAGE PAYMENTS ON UNFINISHED HOUSES
An increasing number of Chinese home buyers have stopped paying mortgages on houses that builders have stopped working on amid the country’s ongoing real estate crisis.
The stoppage protest has spread from 28 construction projects on 11 July to 58 the next day and to 100 across more than 50 cities by the end of last week, according to Jeffries Financial Group.
“The names on the list doubled every day in the past three days,” Jeffries analyst Shujin Chen wrote in a 14 July research note.
“The incident would dampen buyer sentiment, especially for presold products offered by private developers given the higher risk on delivery, and weigh on the [industry’s] gradual sales recovery,” Chen added.
About 1 percent of the country’s mortgage balances are involved, totaling about $58 billion, Jeffries said.
The state-owned Agricultural Bank of China reported holding the equivalent of $98 million in overdue payments for uncompleted homes. The Industrial Bank Co. said about $240 million of its residential mortgage loans were overdue, of which almost $57 million were in default.
As the protest grew, Chinese bank stocks tumbled, with some losing more than 3 percent.
Shares of property development companies were down as much as 2.7 percent, according to Bloomberg Intelligence.
Also, buyers are concerned that the homes they have bought are now worth less than they agreed to pay, Bloomberg said.
Home prices in China slid in May for the ninth consecutive month.
Developers commonly sell homes, and banks lend mortgages on them, before construction is finished.
China’s property development market crashed last year as leading companies were unable to meet debt payments, a saga we reported in a series of articles:
- “China’s Real Estate Market Teeters on Evergrande’s Debt” (21 Sep 2021)
- “China’s Real Estate Troubles Ripple Across Emerging Markets” (26 Oct 2021)
- “China’s Real Estate Crisis Grows” (9 Nov 2021)
- “China May Break Up Troubled Real Estate Giant” (1 Feb 2022)
From 2013 through 2020, developers only completed about 60 percent of the homes they sold, Bloomberg said.
“Presales carry mounting risks for developers, homebuyers, the financial system, and the macro economy,” Nomura analyst Ting Lu wrote in a recent note to clients.
“Failure to build homes on time reduces households’ willingness to buy new properties, and rising raw material prices may mean funds from presales are insufficient to construct them,” Ting added.
“More risk events are likely to come, [against] the backdrop of China’s growth slowdown, residents’ expectation of worse future income, and shrinking property sales,” affecting China’s social stability, Chen cautioned.
TREND FORECAST: Property development makes up as much as a third of China’s GDP. With residential real estate mired in crisis, the consumer side of China’s dual circulation economic policy will not grow to needed levels.
As export volumes shrink amid a slowing world economy, China will not be able to depend on consumer spending to fertilize the growth of its GDP.
Therefore, the country will continue to rely on government-funded public works programs to keep the economy oiled.
As a result, China’s economy will remain anemic and unable to steer the world away from Dragflation, our Top 2022 Trend of rising prices and declining economic output.
LUXURY BRANDS’ CHINA SALES NOT SO POSH
China’s anti-COVID lockdowns through April and May slashed Burberry’s second-quarter sales in the country by 35 percent, the company reported.
Compagnie Financière Richemont, which owns Cartier, Chloe, and Dunhill, among other top-tier brands, saw sales plunge 37 percent for the period.
For years, China’s growing upper middle class has been a key market for luxury houses. The companies have scores of boutiques throughout the country.
A large number of the shops were shuttered for two months this spring during the country’s widespread anti-COVID lockdown.
Now, with Shanghai undergoing a new COVID outbreak, the future of the Chinese luxury market remains uncertain.
Worldwide, Richemont’s second-quarter revenues totaled €5.26 billion, with sales up 42 percent in Europe and 25 percent in the Americas.
Burberry’s take for the three-month period was £505 million, equivalent to $597 million. European sales jumped 47 percent.
Swatch Group lost $400 million in sales in China for the quarter because of the lockdowns in April and May, the company said.
Brunello Cucinelli, the Italian fashion firm, posted second-quarter global sales of €415 million, a 24-percent increase despite disappointing volumes in China.
TREND FORECAST: The equation is simple. The more zero COVID policy imposed by the Chinese government, the lower economic growth. And, as with other nations that locked down the businesses that have gone out of business and the people that lost their jobs, the economic damage will last for years.
Furthermore, with the youth unemployment rate in China hitting a new record of 19.3 percent in June, fewer people will be moving up the economic ladder, and less able to afford high end products.
Therefore, the longer the Chinese economy stays weak, the longer the decline in the luxury market which relies on their massive 1.4 billion population to buy their products.