China’s Star Is Fading

China’s Star Is Fading
Reda Farran, CFA

about 2 months ago4 mins

Mentioned in story

What happened last week?

US

  • Tesla lost its title as the world’s biggest EV firm by sales.
  • The US officially became 2023’s biggest exporter of liquefied natural gas.

Europe

  • UK grocery inflation fell at the fastest rate on record in December.
  • Inflation in the eurozone, meanwhile, accelerated.

Asia

  • China’s factory activity contracted more than expected last month.
  • Foreign purchases of Chinese shares plunged last year.

What does all this mean?

Tesla delivered over 484,000 cars in the fourth quarter, a few thousand more than expected but not enough to retain its crown as the world’s biggest EV firm by sales. That comes after Warren Buffett-backed BYD reported over 526,000 battery-only vehicles sold during the same timeframe, a record number driven mainly by its much broader lineup of cheaper models in China. And while Tesla surpassed its annual goal of 1.8 million deliveries, the number fell well short of CEO Elon Musk’s own best-case projections – with even a bunch of price cuts failing to stoke enough demand for the firm’s EVs.

In a first for the US, the country overtook Australia and Qatar to become the world’s biggest exporter of liquefied natural gas. The US exported a record 91.2 million metric tons of LNG in 2023, helped by the restart of the Freeport LNG facility in Texas, which was shut down after a 2022 explosion. And Europe’s scramble to wean itself off of Russian gas made it a whole lot easier for US LNG firms to find buyers, further boosting exports.

Food has been a major catalyst of rising inflation in the UK over the past couple of years, with blocked supply chains leading to limited inventories and making even everyday essentials more expensive. But now, it looks like the Bank of England’s inflation-fighting interest rate hikes are finally paying off. Annual grocery price inflation eased from 9.1% in November to 6.7% in December – the fastest month-over-month drop since records began in 2008.

Inflation in the eurozone picked up last month, highlighting the tricky path back to the European Central Bank’s 2% target and raising questions over how soon it’ll deliver interest rate cuts. Consumer prices in the bloc rose by 2.9% in December from a year ago. And while that matched economist forecasts, it was a move in the wrong direction after November’s 2.4% pace. The uptick was driven mostly by energy costs, after some governments ended gas and electricity subsidies. Core inflation, which excludes volatile food and energy items, slowed for a fifth straight month, to 3.4%.

Global investors began 2023 buying Chinese stocks at a record pace, boosted by hopes for a post-Covid market revival. But investment flows soon headed into reverse as folks started to worry about a housing slump, rising geopolitical tensions, and more. In fact, foreigners have sold more Chinese shares than they’ve bought since August, when property developer Country Garden's missed bond payments exposed the depth of the nation’s real-estate crisis. That left the balance of foreign flows into Chinese shares at just 30.7 billion renminbi ($4.3 billion) for the year – the least since 2015.

China’s purchasing managers’ index (PMI) showed factory activity in the country shrank for the third consecutive month in December. The official manufacturing PMI fell to 49.0 from 49.4 the previous month, leaving it below the crucial 50-mark that separates expansion from contraction and short of the 49.6 that economists had expected. The data provided new signs of weakness in China’s economic rebound and will probably intensify calls for further government stimulus – especially given policymakers’ recent pledge to maintain a pro-growth stance in 2024.

This week’s focus: China falls from favor

Foreign investors dumped Chinese shares by the ton last year, driving a 13% decline in the MSCI China index. The drop contrasts pretty sharply against the 20% to 27% gains seen in similar MSCI benchmarks in India, South Korea, Japan, and Taiwan. Tech-heavy markets of Taiwan and South Korea, for example, saw their world-leading semiconductor companies boom with investors’ seemingly insatiable demand for all things AI. Corporate reforms, the long-awaited return of inflation, and an endorsement by Warren Buffett, meanwhile, stirred excitement for Japan’s undervalued stocks, sending them to three-decade highs.

Finally, India has attracted a lot of investor attention, with its recent growth success and its enviable demographics. The country surpassed China as the world’s most populous nation last year. What’s more, while China’s population is aging and shrinking, India’s is younger and growing. And most – about two-thirds of people in India – are of working age (between 15 and 64 years old), so the country can produce and consume more goods and services, and drive more innovation. That’s why India’s economy is expected to become one of the world’s fastest-growing – and why it’s poised to surpass both Japan and Germany in size by 2027, becoming the third-biggest in the world.

The week ahead

  • Monday: Eurozone retail sales (November) and economic sentiment (December), Japan household spending (November).
  • Tuesday: Eurozone unemployment (November), US trade balance (November).
  • Wednesday: China loan growth (December).
  • Thursday: US inflation (December), China inflation (December). Earnings: TSMC.
  • Friday: China trade balance (December), UK economic growth (November). Earnings: Bank of America, BlackRock, Citi, JPMorgan, UnitedHealth, Wells Fargo.
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