The Chinese economy in 2024 will be an important factor affecting global markets, particularly the ASX. So many companies are reliant on China for their supply chains or as customers for their goods or services.
This time last year, investors were wondering if trade would recover from past diplomatic spats. While there are signs diplomatic relations are improving, that does not necessarily mean it’ll be straight back to 2019.
The problems that the Chinese economy in 2024 is facing
We have long thought that talks of an armageddon in the economy, or just in the property market are over blown. At the same time, it is clear that growth will be slower than pre-COVID. China grew its GDP at 5% in 2023 – a growth rate many other nations would have longed for, but slower than pre-COVID levels. From 1991 to 2011, annual growth was over 10% on average, and 6.7% since Xi Jinping took charge.
Consumer, investor and business confidence are all lagging and this is all showing in private surveys and in economic figures such as consumer spending. Foreign Direct Investment (FDI) is negative, if the balance of payments is any guide. Even though not many are withdrawing entirely, they are refusing to make new investments, selling some of their assets and remitting earnings back home rather than keeping it in China for easy reinvestment.
The merry-go-round of credit is slowing down rapidly, causing home sales to plunge. Local governments have been struggling, with some having to cut basic services or reduce medical benefits.
Beijing has been reluctant to implement stimulus measures, even though it is arguable that it could have an impact. Comparisons with Japan in the early 1990s and how it has stagnated since then have loomed large.
Arguably the most telling factor of how China’s economy is was that President Xi was not confident in his New Year’s Eve Speech. He admitted there were a number of headwinds facing the country, including rising unemployment, weak demand and battered business confidence. He pledged to consolidate and strengthen the momentum of economic recovery, although how exactly remains to be seen.
So where is it headed? And what does this mean for equity markets?
In all likelihood, there will be GDP growth this year, but certainly below pre-COVID levels and maybe even slower than 2023. Most economists have predicted 5% growth yet again.
A more looming question is whether or not this is another year of terminal decline. The IMF expects 5.4% growth for 2024, but gradual decline to 3.5% by 2028 amidst all these headwinds.
So, what would this mean for global markets, especially listed equities? Not all sectors will see the same impact, but we think it is safe to say that there will be the following impacts to most companies with exposure to China.
- Reduced Demand for Commodities: China has been the world’s biggest importer of commodities such as oil, iron ore, and copper. A slowdown in its economy would lead to a reduction in demand for these commodities, which could impact companies that heavily rely on commodity exports.
- Currency Fluctuations: As China is a major player in the global economy, any changes in its economic conditions could lead to currency fluctuations. This would impact multinational companies’ earnings and potentially result in stock price volatility.
- Impacted Global Supply Chains: China is a vital link in many global supply chains, and a slowdown in its economy could have a domino effect on other countries’ economies. Companies that are reliant on Chinese suppliers may face disruptions, which could impact their stock prices.
- Declining company earnings given all of the above.
Some sectors may see their own unique impacts slowdown in China’s economy. For example, luxury goods companies may see a decline in sales as Chinese consumers cut back on luxury spending, while healthcare companies may see increased demand as the aging Chinese population requires more medical services.
However, the bottom line here is that China’s pre-COVID days of growth are long-gone and companies assuming they aren’t will pay the price. The trouble is, there are a lot of companies that sadly still are, having not diversified supply chains and sought alternative markets for their goods or services. The challenge for investors is deducing whether or not their stocks are realists when it comes to China’s growth prospects.
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