Is China a bargain right now?

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The systemic risk in the economy is affected both by levels of consumer debt and federal debt. They don't necessarily interact directly, but high levels of debt across the economy can create risks for stress in the financial system, perhaps ultimately instability in the financial system.

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Ethan Wu (0:29)

Thank you.

Pushkin.

At the beginning of this year, China was supposed to be the big trade. It was reopening from a period of zero COVID lockdowns. It had all this pent up demand. It was supposed to explode onto the investing scene. Markets were supposed to go up and to the right. Fast forward 10 months, that really has not happened. China has disappointed both in economic terms and in market terms. The CSI 300 index is now below where it was in 2019 Not a good result at all. But today in the show, is the Chinese market warning us that we should expect more pain to come? Or is this a chance to invest in the world's second largest economy at bargain bid prices?

This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I'm reporter Ethan Wu here in the New York studio, joined from London by a recovering Katie Martin. Katie, are you okay?

Katie Martin (1:29)

I'm fine, I'm fine. I had a small altercation with a van on my bike and the van won.

And yeah, so I got bounced off of a bumper, but I'm okay. Like it really could have been a lot worse, but it was still unpleasant.

Ethan Wu (1:44)

We are incredibly grateful that you were okay and that the van was not more victorious. That would have been bad for everyone involved.

Katie Martin (1:50)

Defeat to vans.

Ethan Wu (1:53)

But we're not talking about that today, we're talking about China. And today we thought we'd borrow this construction from our colleagues Hudson Lockett and Cheng Long, who have written a very nice article about the disappointment in Chinese stocks. They break down the reasons for the disappointment into three categories, slow growth, problems in the property sector and geopolitics.

Just starting with growth, right? China has long been this like double digit growing economy, has this incredibly powerful demographic boost, has had wild capital expansion across the country. There's been a lot of talk about bridges to nowhere, but those bridges do add to GDP, at least in the short term.

And now, Chinese growth ambitions have been revised down. The growth target for this year is 5%, which is just kind of a fraction of what it was only a few years ago.

Katie Martin (2:38)

Yeah, exactly. Growth has clearly slowed down and this has been a massive disappointment to investors, because they went into the start of 2023, thinking this is going to be a great year for Chinese stocks, just like they had pretty strong convictions about a lot of things. And 2023 has gone wrong for investors in a huge number of ways, but China is one of them. So the expectation was China took ages to come out of its COVID restrictions. And once they were lifted, everyone thought, well, growth is just going to go to the moon, right? This is going to be a fantastic trade.

Actually, what we've seen since late January, when we had this kind of rush higher in Chinese stocks on the idea that growth was going to rebound really fast, Chinese stocks, looking at the CSI 300, are down 19% from that peak.

Even though this has been a pretty unpleasant year in lots of different markets, that's really pushing it. This is really grim.

Ethan Wu (3:31)

And if you dig into the details on Chinese growth, you can say that there are maybe three problems. One of them, property, we'll get to that in a second, but the others are the consumers feeling a bit beat up still from the zero COVID environment, right? We got to remember less than a year ago, all of China was in a really tight lockdown environment. People were saving at rates that we haven't really seen before in the Chinese data because they felt scared about the world. People in some of the biggest Chinese cities were going without food and medicine. And so this inspired what appears to be kind of a great cautiousness on the behalf of Chinese households.

That has waned a bit. People are saving a bit less on spending a bit more, but we're still at what looks like kind of elevated consumer caution.

The other issue is industrial overcapacity, which is a problem that China has struggled with many times before. There's too much stuff being made at the factories. There is surplus. They have to cut prices to sell it because there's too much stuff.