By Reshma Kapadia
China's economy and markets could be in for another rocky year.
The Asian giant faces the challenges of a possible escalation in the trade war and increased friction with the U.S. While that could mean more volatility, more bad news might end up helping Chinese stocks -- at least for a bit.
The Chinese market bounced on officials' pledges to stabilize the country's struggling economy only to return the gains when the talk wasn't been followed with strong enough action to revive the economy. The iShares MSCI China exchange-traded fund is up 17% this year, but Chinese stocks are still more than 40% lower than the peak hit in March 2021.
Chinese officials have rolled out a progression of measures, from interest rate cuts and promises of looser monetary policy ahead to trade-in programs intended to entice people to upgrade appliances and cars. But it has done little to revive the economy or confidence. The latest indication of consumer wariness: November retail sales growth softened from the prior month. And yields on China's 10-year government bonds are hitting new lows -- 1.72% this past week -- signaling low expectations for a pickup in economic growth.
The 30% decline in property prices has sapped confidence as households watch a major store of their wealth lose value. Local governments are drowning in debt as land sales have dried up. That has led them to curtail spending and sometimes not pay wages. Protests are on the rise, contributing to Beijing's stepped up efforts to do more.
China introduced a 10 trillion renminbi ($1.4 trillion) fiscal package in November to address local government debt and the property market. But investors have been waiting for more -- in details and support.
That waiting game might come to an end in 2025, with analysts expecting officials to offer long-awaited details on fiscal packages and potentially more support in March at the National People's Congress.
That timing will give Beijing a chance to assess the opening trade salvos from the Trump administration and tweak plans accordingly.
For now, most geopolitical strategists expect the incoming Trump administration to raise tariffs in the first 100 days in office, though most expect it to come in stages rather than ratcheting up to the 60% tariffs on all Chinese imports that Trump has threatened.
Helen Qiao, head of economic research at Bank of America, expects Trump to start with 20% tariffs. In that scenario, Beijing could offset some of the hit, allowing the economy to grow 4.5%, a bit lower than the "around 5%" official target. However, if Trump goes big from the start with 60% tariffs, Qiao expects growth of just 3.9%.
Strategists haven't ruled out a deal that forestalls a bigger tariff battle, especially with Trump advisers like Tesla CEO Elon Musk who have a lot vested in the U.S.-China relationship. Trump himself has stressed his personal relationship with Xi, opening the door to a possible bargain that involves Chinese companies moving production -- and jobs -- to the U.S. But the administration also has officials focused on decoupling from China and wary of increasing ties with a chief strategic and military rival of the U.S.
A deal would be positive for Chinese markets and welcome to officials whose priority is stabilizing the economy. But Chinese stocks could benefit either way: The bigger the tariff threat, the more Beijing will have to come up with support.
Though its economy is weaker than when Trump was last in office and is much more reliant on exports for growth and employment, China is better-positioned. It has invested aggressively in exporting industrial robots, cars, and other goods around the world. Only 15% of its exports go to the U.S., down from 19% a couple of years ago. Roughly half go to other emerging markets. China has also diversified its production and supply chains into countries like Mexico and Vietnam, which could mitigate the sting of new tariffs.
Chinese officials are prepared to respond in a more forceful way to the first flurry of tariffs and even the technology restrictions imposed by the Biden administration. Beijing showed what could be ahead with its moves to ban critical minerals like gallium and highly-refined graphite, necessary parts of the military supply chain. Opening its antimonopoly probe into chip giant Nvidia could signal what's yet to come.
That will bring its own share of volatility to global markets. But for those focused on Chinese stocks, the tariffs could finally nudge policymakers to shift from their incremental approach to a more forceful one that investors have been clamoring for much of the past year. The last five stimulus packages since the global financial crisis have generated an average 35% return for Chinese stocks though the gains haven't been sustainable.
Alan Siow, co-head of Emerging Markets Corporate Debt for asset manager Ninety One, wants to see stimulus equal to at least 3% of GDP, or more than $534 billion. For context, the U.S. pumped about 10% of its GDP into the economy following the global financial crisis.
Siow also wants to see evidence the Chinese economy is being driven more by consumption rather than relying on its old playbook of juicing the economy with government-fueled infrastructure spending -- an approach he says would take much bigger investment this time to revive growth.
Others like Qiao take note of officials' comments about changing incentives for government and state-owned enterprises, with executives grappling with political uncertainty and compensation clawbacks and capped salaries that have sapped productivity. Qiao wants to see transparency around key performance indicators for workers, as well as some reassessment of "profit-seeking law enforcement" that has made the private sector executives skittish about being the subject of investigations.
For longer term investors, China needs to tackle the debt issue saddling local governments -- either by writing it off or allowing them to sell assets to deal with it to address the structural challenges that keep some wary.
And while housing sales are improving, investors want to see more signs of a stabilization, starting with inventory declines in the first quarter. If property prices stabilize by mid- to late- 2025, especially in the biggest cities, Ramiz Chelat, who manages Vontobel's Global Equity and Emerging Markets Equity strategies, says that could be enough to nudge households to dip into their growing savings.
Among the stocks that could benefit are Trip.com Group, which is positioned to gain from Chinese households' willingness to splurge on travel at home and abroad, Tencent Holdings, which could see a pickup in advertising if the economy gains its footing and Beike Holdings, the leading property transaction portal in China. Chelat says Beike is more than triple the size of the next largest player and would get a boost if home buyers come back out.
"There has been an attitude change [among officials] but what about the aptitude?" Qiao says. "There's a risk we may see an undershoot of policy easing measures and [the economy] could get challenged at a time when tariffs turn external demand into a headwind."
Many veteran global investors still doubt gains will be sustainable unless Beijing takes a different tack and makes real progress in tackling some of its thorny structural issues, including those that require a significant remake of its economy and a reckoning with its debt.
Write to Reshma Kapadia at reshma.kapadia@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 23, 2024 02:30 ET (07:30 GMT)
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