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Big trouble in little China

January 2019

Things are looking increasingly gloomy in China. Should investors be worried about the year ahead?

  • Weakening figures suggest the trade war is beginning to bite for Chinese manufacturing
  • A slowdown in the Chinese economy has long been rumoured, but now appears to be a reality
  • Retail sales suggest broader confidence problems in China

It has been a worrying start to the year in China. Weakening manufacturing figures suggest the trade war is beginning to bite. Then Apple issued a profits warning, pointing to an unexpected slowdown in demand from China. 

A slowdown in the Chinese economy has long been rumoured, but now appears to be a reality. The most recent manufacturing PMIs showed Chinese factories are back in contraction territory, with the weakest reading since early 2016. The two warring sides may have temporarily agreed a truce, but the intractable problem of the US trade deficit with China remains. 

To date, it has been possible to make light of this slowdown in manufacturing. After all, China was already moving away from low-cost manufacturing towards a more consumer-led economy; the trade war has merely accelerated this process. 

However, the problems at Apple suggest that consumer demand isn’t holding up well either. Up to this point, the service sector had been picking up the slack. Domestic consumption had remained reasonable strong. Apple’s difficulties suggest that this consumer demand is weakening. 

There have been other signs of these problems. Earlier this year, Chinese retail sales were growing at a zippy 10% or so. In December, however, this pace had dropped to 8.1%, the slowest pace since 2003. November figures had already been well behind expectations. The Financial Times reported that China’s auto market, the world’s largest, is on track for its first annual sales decline since the 1990s. 

It is becoming increasingly difficult to ignore the weakness out of China. Beijing had put stimulus measures in place, but these do not appear to have been effective, or at least, not yet. 

This is bad news for investors in Chinese equities who have already suffered a dismal period of returns. However, the impact may spill out further in 2019, with an impact for all investors. China has been the engine of global growth for some time. The US economy may be holding up, but it can’t support global stock markets on its own.   

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