When a country’s economy is in the doldrums, you would likely expect a weak performance from its stock market.
But that’s not the case now with China. While negative numbers pile up for the world’s second largest economy, stocks are soaring there. The Shanghai Stock Exchange Composite Index hit a 10-year closing high Aug. 21. It has climbed 15.6% year to date and 32.4% for the last 12 months, vastly outperforming the S&P 500.
The surge stems from an easing of China’s tariff spat with the U.S. and market hopes that China’s government will provide enough stimulus to boost the economy.
Chinese stocks traded in the U.S. include Alibaba (NYSE: BABA), the world’s largest e-commerce company; music-streaming platform Tencent Music Entertainment (NYSE: TME) and JD.com (NASDAQ: JD), China’s largest online retailer.
As for the economic news, retail sales rose 3.7% in July from a year earlier, the lowest rate in seven months. And industrial output grew 5.7%, the lowest rate in eight months. New yuan loans contracted in July for the first time in 20 years, and new home prices extended their two-year slump, sliding 2.8% year on year.
Property and consumer weakness
China’s property slump and consumer-sector weakness may represent the two biggest problems for the economy. In real estate, excess building and lending have taken their toll.
Look no further than Evergrande, once the country’s biggest real estate developer. It’s now in the process of liquidation after defaulting on its debt. Real estate accounts for about 19% of China’s GDP, according to Bloomberg.
Turning to the consumer sector, the main problem appears to be stagnant income growth. The growth rate of disposable income in China has shrunk by half since the pandemic began in 2020, to 5% a year, Jeremy Stevens, Asia economist at Standard Bank, wrote in a report cited by CNBC.
That has put a damper on consumer spending (see the retail sales number above). The weakness of consumer spending means it accounts for only about 40% of GDP, compared to 50% to 75% for other major economies.
Economists surveyed by Reuters expect GDP growth of only 4.6% this year, down from the official target and last year’s total of 5%. Economists agree that China greatly inflates its GDP numbers.
Why the buying spree?
So what’s making traders and investors buy, buy, buy Chinese stocks? First, there’s the tariff truce between the U.S. and China. In April, the U.S. socked a 145% tariff on China’s goods, and it responded with a 125% levy on the U.S.
Then in May, the two sides called off the dogs, agreeing to a 30% tariff for Chinese goods and 10% for U.S. goods. Presidents Trump and Xi Jinping reached a broad trade agreement in July. And Trump has declared a tariff truce, leaving the 30% charge in place, at least until November. The U.S. is China’s biggest export market, accounting for 15% of its overseas shipments.
Turning to government stimulus, China has implemented several measures to boost the economy over the past year. It has lowered interest rates, expanded money supply, cut banks’ reserve requirements, and increased government spending. But obviously it hasn’t been enough to pull the economy out of its stupor.
U.S.-China trade relations have a volatile history, and there’s no guarantee that China’s government will pull out the stops on stimulus. So it’s unclear how long the stock market can keep rising.
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