China Concerns Loom Over U.S. Stocks
The title above comes from an article in today’s (February 5, 2019) Wall Street Journal (WSJ) by Ira Isoebashvili and Saumya Viashampayan. There has been a consistent drumbeat over the past year, coming from numerous publications and China ‘experts,’ regarding what they see as a precarious building debt bomb in China. The article portrays a nervous U.S. market, as traders become more concerned that China is heading for a hard landing. One of the canary’s in the coal mine has been statements by tech giant Apple, that its fourth quarter 2018 sales, and first quarter 2019 outlook was not as good as expected — due in part to the economic slowdown in China. I refer you to today’s WSJ for the full article.
As the authors note, “Chinese demand is crucial for tech behemoths such as Apple, global market makers, and industrial firms, and a sharper-than-expected slowdown in China would ripple far beyond its borders. Among investors’ worries,” they add, “is whether the Chinese government will be able to navigate slowing growth, without a policy misstep that exacerbates its woes. Case in point: The devaluation of the yuan in 2015, which authorities said was an attempt to make the currency more market-driven, fueled fears about Chinese growth that rocked global markets, and triggered months of destabilizing capital outflows from China. This week, investors will be awaiting signals that a possible meeting between the U.S. and Chinese presidents will take place at the end of this month/February.”
“Recent history suggests they [investors/traders] have reasons to be concerned,” the WSJ noted. “China fears were central to major market drops in the past few years, when episodes of elevated concern about the stability of the country’s financial system shook prices for stocks, commodities, and emerging market assets around the world. Many are also worried that China’s central bank may have less scope to deploy the huge stimulus programs that slowed [previous] economic declines, and eased investors’ worries in the past.”
“Broadly, we are very cautious,” said Louis Lou, Director of Investments at Brandes Investment Partners. “We see an economy that is running out of options.” “Mr. Lau’s fund has whittled down its exposure to Chinese assets to around half its benchmark,” the WSJ reported. “The fund’s remaining China holdings are focused mainly on companies that are better protected from slowing growth, or trade wars, such as select Chinese telecom companies and banks.”
“Recent Chinese data have [recently] provided more evidence of slowing growth,” the WSJ noted. “China’s official Purchasing Manager’s Index (PMI) showed manufacturing activity contracting for the second month in a row in January, though at a slower pace than the preceding month. Last year’s 6.6 percent growth rate was the slowest annual pace recorded since 1990. Some observers believe things may be even worse than the official numbers show.” Leland Miller. founder of economic research firm, China Beige Book, told the WSJ that survey data from industry sources inside the country showed weakness in an array of sectors, from automotive, to chain restaurants, and luxury goods.”
“Mr. Miller is concerned that years of state stimulus have helped balloon China’s debt, hindering official’s ability to kick-start growth this time around,” the WSJ reports. “The debt level of Chinese non-financial corporations stood around 157 percent of gross domestic product in the third quarter of 2018, compared with about 94 percent for emerging markets as a whole,” data from the Institute of International Finance showed.
“Thanks to past rounds of stimulus, investors “have become very comfortable with the idea that weakness is transitory,” Mr. Miller said. “That’s not working anymore because debt buildup is outpacing growth.”
But, not everyone is so down on China’s debt position. Torsten Slok, Chief International Economist at Deutsche Bank told the WSJ that China “has [successfully] engineered a soft landing.” And, Amy Kam, a bond investment manager at GAM Investments, said “China can avoid dealing with its debt burden for now. In the medium to long-term, I worry.” Sounds like us. “They need to deleverage the corporates; and, need to have a more-effective monetary mechanism,” she added.
“While broader concerns about growth and the indebtedness of Chinese companies are valid, they are already priced into stocks,” said Eric Moffett, a portfolio manager at T. Rowe Price in Hong Kong. That is why his portfolio is currently overweight China shares,” the WSJ reported. “While the news is bad, you’ve always got to ask what’s in the price,” or already priced in/discounted, he said.
So, despite the title, how you see it depends on where you sit. My own view is that the trade ‘war’ with China has made the situation worse for Beijing; and, maybe the U.S. and the West can get a new trade agreement that substantially diminishes the unfair trade practices that Beijing has been conducting for decades. China’s debt problem, much like our own — won’t be a problem until it is. And, no one really knows when, or if that will occur, especially to the degree that some believe it will. If you believe that the U.S. and China will soon reach some kind of notable trade agreement, one can make a strong argument that now is the time to be buying shares of Chinese companies such as Alibaba, Baidu, Tencent, etc. — since any kind of significant agreement is likely to send shares of these companies….sharply higher. That would appear to be exactly what Mr. Moffett is doing at T. Rowe Price, Hong Kong. RCP, fortunascorner.com