Towards the end of last year, China surprised the world with an abrupt pivot away from the strict restrictions of its long-espoused “Zero-Covid” policy., including quarantine requirements for inbound visitors. Despite an initial surge in infections, global businesses rushed in, hoping to cash in on the economic recovery.
Sentiments were further boosted by steps to stimulate economic growth and domestic consumption, mapped during and around the annual Central Economic Work Conference. These steps also helped ailing Chinese developers ease their liquidity strains and revive home purchases.
These measures seem to be working. According to the data released by China’s National Bureau of Statistics on April 18, the country’s GDP grew by 4.5% in the first quarter of the fiscal year. This was better than the forecast of 4% and the highest growth since the first quarter of last year.
Six months on, while the country is still open for business, the momentum has visibly slowed. While China’s exports in April grew by 8.5%, the country’s imports declined by 7.9% year-over-year as growth in the service sector softened, and manufacturing contracted again in three months.
With the 50-mark separating growth and contraction, the Caixin/S&P Global services purchasing managers’ index fell to 56.4 in April from 57.8 in the previous month, and the Caixin China general manufacturing purchasing managers’ index fell to 49.5 in April.
China’s top leaders have also taken note. A translated state media readout of the Plitburo meeting said, “At present the positive turn in China’s economy is primarily one of a recovery. Internal drivers still aren’t strong, and demand is still insufficient.”
As a result of this patchy growth, analysts at Morgan Stanley foresee a significant dip in demand and output of Chinese steel that could result in a 28% decline in iron ore prices by the end of 2023.
With markets mirroring this moderation, Citi has pushed back its stock rebound forecasts, and its analysts expect Hang Seng to take until the end of September to reach 24,000.
Moreover, more significant concerns are looming on the horizon. With China’s National Bureau of Statistics reporting that the population dipped to 1.412 billion last year from 1.413 billion in 2021, the country’s demographic dividend for the past two decades threatens to turn into a demographic decline.
Despite abolishing its one-child policy in 2016 and scrapping childbirth limits in 2021, China still struggles to boost its declining birth rate.
Would China be able to dethrone the U.S. as the largest economy before its population ages significantly?
- Yes
- No
- Can’t Say
Additionally, economic cooperation has taken a backseat, with competition between U.S. and China degenerating into conflict. According to an IMF forecast, escalating tensions between the two superpowers could cost the global economy 2% of its output.
This has impacted the stocks of American businesses as well.
NIKE, Inc. (NKE) and other apparel manufacturers are currently stuck between a rock and a hard place. A House committee examining the U.S. government’s economic relationship with China has asked the company and its peers, such as ADIDAS AG (ADDF), Temu, and Shien, to furnish information by May 16 regarding the use of forced labor during production.
If the use of materials and labor sourced from the Xinjiang Uyghur Autonomous Region of China could be proven, it would violate U.S. trade law under the 2021 Uyghur Forced Labor Prevention Act.
Back in China, consumers’ backlash over foreign brands’ stance on Xinjiang cotton and Covid-19 has had them scrambling to limit the damage by touting hyper-local and patriotic strategies in a bid to prevent local competitors from making further gains.
Starbucks Corporation (SBUX) surpassed profit estimates due to the Chinese recovery. However, the company’s guidance has ended up fanning investors’ anxieties. The company reported that after a “faster than expected” recovery in the first three months of 2023, average weekly sales in China have started to moderate.
Although revenge spending after years of strict restrictions mellowing down into a moderate growth rate is nothing out of the ordinary, the management commentary was enough to sink the stock by about 6% following the earnings call.
The U.S. maker of heavy equipment for the mining, construction, and energy industries Caterpillar Inc. (CAT), posted a lower-than-expected profit for the first time since the beginning of the pandemic owning to increased raw material costs.
More importantly, CAT’s warning about weaker demand for its machines in China, which accounts for 5 to 10% of the company’s sales, spoiled the mood on the street has sent its shares tumbling.
Bottomline
Although U.S. and Chinese businesses have benefited from pent-up demand unleashed during the first quarter of the year following the opening up of its economy, investors would be wise to treat it like an exceptional windfall rather than a lasting tailwind. That would help them adjust their expectations in favor of modest growth and perhaps even an occasional contraction during the latter half of this year.
