China: Western pessimism is overdone
By Stefan Breintner, Head of Research and Portfolio Management
China’s economy has disappointed lately. The hoped-for turnaround after the abandonment of the zero-Covid-19 policy has so far largely failed to materialise. One reason for this is that mainland Chinese hardly received any support from the state during the Covid-pandemic.
China pessimism in the Western press and among Western investors has reached a record high. But the economic situation is probably not as bad as some people say: the country will likely remain an important manufacturing location and the Chinese electric car industry has good growth prospects.
Gloomy outlook for the real estate sector
The real estate sector remains engulfed in problems. Most market participants and experts the DJE research team spoke to during a recent trip to China assumed that the real estate market has not yet bottomed out. The transaction volume in the Chinese real estate market could decline again in 2024 and new construction activity is likely to remain weak for some time. In Tier 1 and 2 cities (Tier 1 cities: Beijing, Shanghai, Guangzhou and Shenzen, Tier 2 cities including: Tianjin, Nanjing, Chongqing), the situation is significantly better than in Tier 3 and Tier 4 cities.
Further stimuli (such as the recent significant reduction in mortgages rates for 1st and 2nd homes) are likely to follow.
Currently, the Chinese are investing their money mainly with big banks, which do not have any liquidity problems for now. However, renegotiated mortgages with lower interest rates are negative for the banks' profits. Further problems with so-called "wealth management products" ("uninsured" or non-guaranteed financial products that banks and other financial institutions sell in China) cannot be ruled out. Bail-outs, especially by the state, in the event of an economic/financial crisis are very unpopular.
Therefore, a sudden rise in confidence for the economic development seems unlikely in the near future.
Looking at GDP growth for 2023, the projected 5% seems realistic. For 2024, GDP growth is currently expected at around 4.5%. Consumption continues to grow but not as strongly as expected. People go out and consume, but spend less in shops, restaurants and when travelling (hotels in Macau are full, for example, but people gamble less). China's consumption and economy will continue to grow, but not as strongly as hoped. This means China is not going to be a main driver of world economic growth as was the case in the past.
China will remain an important manufacturing hub
However, China's position as the world's leading manufacturing hub is unlikely to suddenly change. Exports to the USA are declining, but those to other ASEAN countries (Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei, Vietnam, Laos, Myanmar and Cambodia) continue to rise.
India still has major infrastructure deficits. Claims that India will replace China as the global manufacturing hub are therefore more wishful thinking than anything else. However, China's manufacturing sector has the problem that it is now just as expensive to produce in China as in Mexico, which is driven by higher wages.
Although infrastructure investments are no longer achieving the growth rates of the past, they will continue to be an important factor in boosting the economy in the future. China's steel production continues to perform well: in 2023, total steel production is expected to exceed 1 billion tonnes for the fifth consecutive year, despite weakness in the construction sector. China's iron ore production costs are $80-90/tonne, so iron ore prices above $100/tonne seem realistic going forward.
Beacon of hope: renewable energies and electric cars
One area that is showing strong signs of growth is China’s NEV ("new energy vehicle") sector including batteries and the renewables sector. What Western have struggled to achieve, is already a reality in China. In the first six months alone, approx. 100 GW of renewable capacity was installed.
China dominates the global battery industry, especially in the cheaper (and also safer) LFP battery segment. China is also far advanced in the area of autonomous driving and robotaxis. The technology company Pony AI is considered one of the most valuable start-ups in China and has about 290 robotaxis in operation, mainly in Beijing and Guangzhou. In the last 9 months, the company has completed more than 10,000 driving hours without a single accident.
EV penetration in China is expected to reach 30% in 2023, rising to 50% by 2025. Chinese brands are currently gaining massive market share - also abroad.In 2023, China became the world's largest car exporter.This means that there is at least one sector with great growth prospects despite the overall weaker economic situation.
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