Just over a year ago, the world watched as China reopened after three long years of strict pandemic lockdowns. Expectations were high for a strong economic recovery, driven by pent-up demand and consumer spending.
The reality has been completely different. Despite a busy travel season around China's Lunar New Year (with a record 9 billion domestic trips expected, 80 million by air), the anticipated economic rebound has largely failed to materialize, even as World markets have risen to near record levels.
This slowdown appears to be not just a temporary blip, but a sign of deeper structural problems within the Chinese economy. The country's gross domestic product (GDP) reportedly grew by 5.2% in 2023, an admirable figure at first glance, but one that masks underlying challenges. A closer look reveals a significant slowdown from the pre-pandemic era of steady +6% growth. Some industries, such as electric vehicles, saw notable sales in China last year, but this strength has not been enough to offset serious weaknesses in other sectors, particularly real estate, which remains a major drag on the economy.
Our decision to close the China Region Fund last year was a move based on recognition of the early signs of these economic challenges. It is a decision that, in retrospect, has been vindicated. The ongoing real estate downturn and regulatory uncertainties have further exacerbated investor apprehension, leading to a significant outflow of $68.7 billion in foreign direct investment (FDI) for the first time since 2018.
Chinese stocks continue to underperform. Both mainland and Hong Kong-listed stocks ended 2023 with losses, even as other Asia-Pacific markets recovered. Surprisingly, Japan's is about to reach a new all-time high after 34 years.
This year hasn't gotten off to a great start for Chinese stocks either. The CSI 300 lost more than 7% in January, while the Hang Seng lost more than 9%.
“China seems to be divorced from the rest of the world,” Steve Sosnick, chief strategist at Interactive Brokers (NASDAQ:IBKR), told Bloomberg. “Part of the lack of equity response is that the global economy is doing well without China.”
Mexico surpasses China as the main source of imports for the United States
In fact, in a shift not seen in more than 20 years, Mexico overtook China last year to become the top supplier of imports to the United States. This shift highlights growing tensions between Washington and Beijing, along with U.S. efforts to source more products from closer allied countries. nations.
Recent data from the Department of Commerce indicates that imports from Mexico to the United States increased almost 5% from 2022 to 2023, reaching more than $475 billion. In contrast, the value of imports from China saw a sharp drop of 20%, falling to $427 billion.
Will China's measures work to stabilize the market?
Efforts to stabilize the Chinese market have so far failed to raise investor confidence. Last Tuesday, the China Securities Regulatory Commission (CRVS) announced plans to end the practice of brokerages borrowing stocks for lending and limit the scope of what is known as the securities on-lending market, in a measure intended to soon curb sales activities.
This came a day after the regulator promised “zero tolerance” against short sellers, warning them they could “lose their shirts and rot in jail,” according to a Reuters report.
These regulatory measures were introduced after the Chinese government declared in October 2023 that it would issue 1 trillion yuan ($140 billion) in Chinese government bonds (CGB) to support local government finances and finance infrastructure projects. in areas affected by natural disasters during the past year. .
The move was intended to send a signal to global markets that China is once again “pro-growth,” but as Morgan Stanley's Schuyler Hooper writes, the strategy is seen as “simply a rehash of the old China policy playbook, where they rely on investment to underpin 'economic' growth, while growth in consumption, exports, property and private investment remains sluggish.”
The risk, Hooper notes, “is a short-lived cyclical rebound amid a long-term secular slowdown” in the Chinese market.
The fundamental role of diversification
The Chinese government faces a daunting task in addressing deep-seated problems within its economy. Chaos in the housing market, local government debt and deflationary pressures are major obstacles to sustained growth. Geopolitical tensions add another layer of complexity.
The situation serves as a reminder of the importance of diversification and the need to remain agile. I believe it is more important than ever to rely on sound investment principles and a diversified portfolio.
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The CSI 300 Index is a free-float weighted index consisting of 300 A-shares listed on the Shanghai or Shenzhen stock exchanges. The Nikkei 225 Stock Average is a price-weighted average of 225 top-rated Japanese companies listed on the First Section of the Tokyo Stock Exchange. The TWSE Index, or TAIEX, is a capitalization-weighted index of all listed common stocks traded on the Taiwan Stock Exchange. The index has a base value of 100 based on its 1966 level. The index is a capitalization-weighted index of all common stocks on the KRX main board. The index was developed with a base value of 100 as of January 4, 1980. It is a free-float capitalization-weighted index of a selection of companies on the Hong Kong Stock Exchange. The index was developed with a base level of 100 as of July 31, 1964.