NEWS + VIEWS – 15/3/2024
Markets
Markets were mixed this week. US stocks fell last night after another round of inflation data came in hotter than expected. Investors have been scrutinising the path of inflation as they try to anticipate when the Federal Reserve will begin to cut interest rates.
The Australian share market snapped a two-day winning streak yesterday due to a sell-off in banking stocks. Bank share prices have rallied in recent months despite a broadly consistent negative consensus view amongst analysts.
China Weakness
China’s share market has shown some signs of life recently but the down trend since 2022 is probably still in place. The recent uptick has been put down to traders rather than long term investors.
Geopolitical analysts have blamed the centralised economy where decisions are increasingly controlled by the Chinese leadership, centered around internal security and external relations with economic matters a distant third.
China is important to Australia as an importer of our energy and minerals. To use an old saying ‘If China sneezes, Australia catches a cold’. The Wall Street Journal analysed why China’s economy is struggling, covering seven key factors that explain China’s economic weakness.
Real estate investment has plummeted
Real estate (and infrastructure) traditionally has been the ‘go to’ stimulus for China. Tightening credit, COVID restrictions and high-profile property company busts have sent this sector into steep decline.
Consumer confidence is weak
Consumers have become fearful as real estate prices have dropped. Falling consumer demand then flows through to company investment and hiring, which in turn exacerbates real estate price weakness and so on.
Deflation has taken hold
US, Europe and Japan CPI readings are now in the target range of 2% to 3%. China, on the other hand, has been showing negative CPI readings since June 2023.
Governments fear deflation taking hold as it becomes a drag on economic growth. Consumers delay purchasing as ‘it might be cheaper if I wait’. Companies defer investing for the same reason and react to falling consumer demand. Deflation like inflation can be very ‘sticky’ as negative investor and consumer mindsets must change.
Very high debt levels
Previous stimuli have involved easing credit, particularly around property. The chart below shows China’s debt rocketing from around 150% of GDP in 2007/08 to around 300% of GDP and still rising.
There is little headroom for more credit stimulus. Also, investors are concerned about the government introducing measures to manage the debt pile. The possibility of major bad debts in the ‘nonfinancial corporations’ sector (e.g. local government) is real.
China is getting older
China’s population is ageing and shrinking. This means lower production and consumer demand, and less workers supporting more older retirees. Some analysis suggests that this trend started six years ago.
Foreign investors leaving
Money started to flow out of China in the second half of 2023 reversing a 25-yearold record of inflows. Fund managers and manufacturers are looking for a more stable political and economic environment.
Trade barriers in China’s export markets
US, Europe and other markets are responding to China’s more aggressive geopolitical approach and building alternative sources for strategic products.
China has been attempting to dominate emerging energy technology such as solar, batteries and electric vehicles. The US’ oddly named ‘Inflation Reduction Act’ is subsidising companies in key industries to meet China’s challenge.
The result is slowing growth
The Chinese government announced a 5% economy growth target for 2024. There is always some doubt around the veracity of China’s numbers. Nevertheless, China will likely grow but at lower rate. With property and infrastructure development ‘maxed’ out, the question will be whether China can adapt to growing in different sectors.
In summary, China has significant structural issues with a centralised government’s focus elsewhere. Investors looking for exposure to Asia are targeting alternatives with Japan fast becoming a favoured destination.
Gerard O’Shaughnessy
P 0423 771 330
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