China Has a New Playbook and Demand Won't Be the Same
While the market continues to expect a pre-pandemic return from China, that's proving to be some wishful thinking that won't pay off.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
As much as the U.S. is fighting to keep China’s electrical vehicles and cheap imports at bay, there is something that the U.S. and the rest of the world need from China, and that is for its economy to recover.
Since COVID-19, China's economy has been unable to come back to its pre-pandemic trend and as each year passes by, optimists move their assumptions that it will return one year ahead, hoping that they will be proved right. But what is not being considered is that China has a new playbook, and that it is one of de-leveraging its debt-ridden construction growth and focusing on domestic consumption and national security.
The China from 2000 to 2010 is not the same China as that of today. But most have not accepted that reality yet. In the past, China used its debt and stimulus, throwing money into infrastructure-led projects as that was a quick fix to get their GDP growth targets higher in a short amount of time. But since the collapse of the housing bubble and massive defaults, they know they need a new game: their consumer.
It is no mystery that the S&P 500 has rallied mostly on the back of a handful of Magnificent Seven names. The market is up 18% year to date, and that can mostly be driven down to these names. Whether an investor decides to put money into the market today will depend on whether they believe the remainder of the 493 names will show year-over-year earnings per share growth going forward.
The large-cap technology names have seen year-over-year EPS of 35% in Q224 and that rate is slowing down, as most of the upside has been priced in; the story is more than known. The bigger question is if one believes that the rest of the index will start seeing this recovery that everyone keeps talking about. It is based on China magically returning from its post-COVID and housing slumber to one north of 5% GDP growth as though magically they will once again print trillions in stimulus to pump their economy when they know full well that all that does is work for a short while, only to fizzle out. They need some long-lasting economic reforms and that is exactly what President Xi Jinping has been talking about, but no one seems to listen as they are so used to the old playbook.
Oil is one commodity where this wishful thinking is clearly evident. OPEC+ still expects China to ramp back up in the last three months of the year, despite its slowing demand trend in the first seven months of the year.
According to a Reuters report, China's oil imports rose for 19 straight years from 2001, when they were just 1.2 million barrels per day (BPD), to 2020 when they hit 10.85 million BPD, the second-highest total on record. Even though volume declined for two years, crude imports hit an all-time high of 11.29 million BPD in 2023. But that is now falling.
So far in 2024, crude imports fell to just 10.90 million BPD, that is about 320,000 BPD below the level for the same period last year. OPEC+ expects demand growth north of 2 million BPD, of which China will be growing about 700,000 BPD when demand has been falling this year. Given some of the secular changes, as China uses more coal or solar and renewables as it moves their fleet of cars to electric, this is not being picked up by OPEC+ or other groups.
Commodities are all about inventory balances. Based on the current demand/supply balance, prices are forecast to be higher. But it is the "demand" that is off, not the supply. But, then again, everyone still expects a soft landing and no chance of a recession at all this year.
At the time of publication, Bengali had no positions in any securities mentioned.
