12 months ago • 3 mins
China’s economic reopening was expected to be like the awakening of a magical creature. It’s not been nearly that dramatic.
✍️ Connecting The Dots
Only a few months ago, all the talk was that 2023 would see the Red Dragon roar back to life, putting a few troubled years behind it and lifting global economic growth along the way. Chinese stocks were certainly flying high, and the iShares China Large-Cap ETF posted a whopping 60% rally off its low – a 15-year low, mind you. But it’s all gone a little pear-shaped of late. See, softer-than-expected results from Chinese bellwethers like JD.com, plus poor car sales data, and the government’s new economic growth target of just 5% – its lowest in 30 years – have investors thinking that China mightn’t be this year’s white knight, after all. And so the iShares ETF’s given back 20% of those big gains.
If you’re wondering what’s going on, well, the answer probably lies beyond China’s shores. The country’s still reliant on exports for most of its economic growth, and those fell a dramatic 6.3% over January and February, as buying demand from the US and Europe weakened. And as tensions with the West ramp up, and with the US seeking more trade restrictions on strategically important technology products, it’s no wonder the Chinese government is doubling down on its push to become more self-sufficient in areas like tech and healthcare.
But maybe things aren’t all bad. China’s probably fed up with missing growth targets, and as all good CEOs know, it’s better to “beat and raise” expectations than to “miss and lower” them. So perhaps the world’s second-biggest economy will fare better than its 5% growth goal. And then there’s inflation: a booming Chinese economy wouldn’t do much to help the world bring down sky-high prices. So a not-too-hot (but not-too-cold) China is probably more helpful on that front.
1. Self-reliance may be the goal, but it’s still a distant one.
Becoming self-sufficient isn’t a new ambition for China. Standing on its own two feet has been a long-term goal for the country for decades. But consumption still only accounts for under 40% of the Chinese economy, versus nearly 70% in the US. And until consumption becomes the main driver of growth, exports and foreign investment will still be needed, whatever the political rhetoric.
2. It’s hunky dory if you’re inside the circle.
China’s pursuit of self-sufficiency in sectors like technology and healthcare doesn’t have to be a bad thing for all international firms. In fact, for companies that have been doing business for a long time from within the country (rather than selling into it), these policies could be a good thing. Take life sciences: China needs world-class expertise and products to support the development of its healthcare industry. And leading American firms with big Chinese businesses – like Thermo Fisher Scientific – have been raking in government cash for many years.
🎯 Also On Our Radar
There’s an eerie feeling in the banking sector as Silicon Valley Bank looks destined to fail. Its problems arose when tech startups began whipping their money away from the bank, forcing it to sell bonds at a hefty loss (their prices have fallen hard as interest rates have risen). It’s likely this is an isolated event at a single, specialist bank. But investors will be nervously side-eyeing bigger banks for the next few days, at least.
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