December 7, 2023

China has been a case of serial disappointment for the market this year and that was highlighted once again by today’s economic data.

Exports fell 14.5% y/y compared to 12.5% expected. That’s a relatively minor miss and could be somewhat forgiven due to the covid bullwhip effect on goods consumption but the real red flag was in imports. They fell 12.4% y/y, far worse than the 5.0% expected. I’ve always highlighted Chinese imports as an early indicator of global economic strength because raw materials imports to China reflect downstream orders for finished goods. Perhaps that’s less true now as domestic consumption grows but whether it’s due to global or domestic weakness, it’s certainly negative.

China imports yy

The last two weeks have featured the market grappling with China and the potential for stimulus. After hinting at stimulus for weeks, a series of half-measures were announced in July and by the end of the month, Chinese stock markets began to respond. That also spilled over into China-sensitive commodities like copper and oil.

In the past week though, that optimism began to fade. Today the MCHI ETF is down 2.3% in the third day of selling.

Some market watchers are throwing in the towel as well. Today Morgan Stanley lowered China to underweight while boosting India to overweight. Morgan Stanley’s economics team thinks the trend of GDP growth in China is likely to be around 3.9% to the end of the decade vs. 6.5% for India.

The signal from the market is that Chinese growth will continue to underwhelm and that the latest stimulus measures won’t be enough. That could prompt more easing from China but lowering borrowing costs also runs head-first into China’s efforts to rebalance the real estate sector.

Adding to the worry is that the US appears to be kicking China when it’s down. Efforts to curb chip sales and talk of capital strangulation along with fears of a war in Taiwan are a source of major angst. I fear that China has taken its best shot at reigniting growth and it’s not enough.

Some argue that it was analysts who were off target with estimates ahead of today’s economic data. They say that while the value of imports fell, that’s because the prices of commodities are far lower than last June. They argue that volumes are higher, so there is still residual strength.

I will continue to watch out for signs of Chinese stimulus but the equation has changed. For most of the last 25 years, when China said stimulus was coming, that was enough to goose markets. Now the market is in a ‘show me’ mood, where it wants to see strong, concrete measures before responding.

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