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Market Pulse
Tuesday, August 22, 2023

The Great Slowdown

Welcome to this week’s Market Pulse, your 5 minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team. 

In this week’s edition we put the current events in China into perspective:

  1. How We Got Here
  2. Housing Trouble
  3. The Silver Lining

Read the full Market Pulse below, or if you want to access it on the go, download the Sidekick app.

Adrian (Portfolio Manager), and the rest of the Sidekick team.

It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.

The Great Slowdown

不怕慢, 就怕停。 (bú pà màn, jiù pà tíng.) – “Don’t be afraid of going slow, just be afraid of standing still.” (Chinese Proverb)

China is always a topical subject but even by the standards of the second largest economy, you may have noticed that the number of headlines has increased considerably in the past week. It’ll be hard to find some positive ones. 

The turnaround in the narrative has been dramatic. Only six months ago China was coming out of a covid lockdown. Taking a page from the pandemic playbook, when pent-up demand fuelled the subsequent economic recovery in Europe and the US, economists and investors alike saw China as the main cog in the global growth engine of 2023.

When it became clear that consumer spending wouldn't lead to the expected economic recovery, investor focus shifted to government stimulus measures. The optimists would say a mild slowdown is positive, as it would trigger the government to act, lifting the economy as it did so many times before.

But data released this week [1] showed that the deceleration in areas like manufacturing, real estate, infrastructure investments, and retail sales was worse than expected. This has re-ignited fears of a hard landing in the world's most prominent manufacturing hub. Will the adage “when China sneezes the World catches a cold” come true?

1) How we got here: gradually, then suddenly

Hindsight is 20/20, especially regarding macroeconomics, but to put things in perspective, it would be a mistake to blame all of the slowdown on China’s infamous zero Covid policy. In the winter of 2019, China was already suffering from economic imbalances caused by Donald Trump's tariff war [2] and a regulatory clampdown on credit and private companies [3].

Also, it's common sense that an economy as vast as China's cannot continue expanding at the rates that the World became accustomed to during the twenty years following its entry into the World Trade Organization. 

During 2020/2021, the strict Chinese covid policy was unlike anything we've seen in the West and for a while it seemed like China had mastered the pandemic better than anyone else [4]. But while the US and Europe acted swiftly to stimulate demand by handing out checks to the population, China’s policies were focused on the supply-side, mainly keeping factories open. It’s thus unsurprising to see “revenge spending” having less of an impact on the Chinese economy than it did on the Western ones.

2) Housing trouble

But the fundamental problem at the heart of the Chinese economy is far more significant than post-lockdown consumer spending. It all started during 2020/2021 when Xi Jinping and the Chinese Communist Party were boisterous about handling the pandemic and deliberately decided – with a series of restrictive policies – to crack down on private entrepreneurs and slow down a hot property sector [5].

The significance of that decision still reverberates today as real estate makes up one-fifth of the economy and 70% of Chinese household wealth [6]. It’s already brought down the country's second-largest property developer, Evergrande, and Country Garden, one of the most reputable and financially sound developers as of last year, has started missing its bond payments [7].

Chinese real estate developers resemble banks because they take short-term deposits to fund their projects. With liabilities of some £151 Billion, Country Garden has the same liabilities as a large regional bank like Silicon Valley Bank [8]. Another significant high-profile bankruptcy could erode the already fragile confidence in the Chinese government and the property sector. It could also perpetuate the recent bout of deflation [13] we’ve seen in China which would increase debt in real terms, putting even more pressure on privately owned developers.

A surprise interest rate cut last week did little to alleviate investor’s concerns [14] but the Chinese government still has a few levers to pull. From vowing to act as a lender of last resort to reversing some of the restrictive credit policies, Xi Jinping could still see his plan come through. But it's a delicate balancing act fraught with risk.

3) The silver lining

Despite the barrage of negative news, there are still reasons to be optimistic about the Chinese economy. Many who talk about the Japanification of China - alluding to the bursting of the Japanese asset bubble in the early nineties and subsequent "lost decade" - forget that China's growth didn't collapse as Japan's did. China is slowing down but is still growing by 4.6% in 2023 if we annualize last week's numbers [9]. It also has a GDP per capita three times below that of Japan, resembling a developing country rather than a developed one.

The property sector may be in trouble, but the services sector is more significant and growing fast [10]. Pockets of the economy are still extremely dynamic: China overtook Japan recently to become the World's largest exporter of motor vehicles [11]. It is also the number one exporter of electric cars to Europe. That is no small feat.

China is driving most of the investment in renewables worldwide, outspending the US four to one even after we consider the Inflation Reduction Act. Let's take the US and Europe together. China is still outspending them almost two to one in what many believe to be the cutting edge of the new industrial revolution [12].

So, while the recent data suggests China has hit some speed bumps, we shouldn't be too quick to write China entirely off. Circling back to the Chinese proverb we started with, we can see China going slower, but not standing still.


[1] https://www.reuters.com/world/china/china-cuts-key-rates-industrial-output-retail-sales-growth-miss-forecasts-2023-08-15/

[2] https://www.bbc.com/news/business-48196495

[3] https://www.reuters.com/world/china/chinas-property-crackdown-stalks-credit-markets-2021-08-26/

[4] https://www.bmj.com/company/newsroom/the-world-can-learn-from-chinas-response-to-the-pandemic-say-experts/

[5] https://edition.cnn.com/2020/09/22/business/china-private-sector-intl-hnk/index.html

[6] https://www.economist.com/finance-and-economics/2022/09/12/chinas-ponzi-like-property-market-is-eroding-faith-in-the-government

[7] https://www.theguardian.com/world/2023/aug/18/china-property-crisis-deepens-as-developer-country-garden-at-risk-of-default-evergrande

[8] https://www.svb.com/newsroom/facts-at-a-glance

[9] https://www.reuters.com/world/china/chinas-q2-gdp-growth-slows-08-qq-just-above-expectations-2023-07-17/

[10] https://tradingeconomics.com/china/gdp-from-services

[11] https://techcrunch.com/2023/08/08/powered-by-electric-vehicle-growth-china-overtakes-japan-as-biggest-auto-exporter/?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAALyqN6K6ziEOSY_LtQOD7R6mtc9eQtjnaU_zlqm4xKet5Vtt3zhGEYebXCA8w9hOfwIKkDKE2UdVWPeRuraX57vqWAW-lMir18K-ft5BHFfhbR0HF28nU-HNfp3kcxXtJQtvzve0CGJ8NeJ1n2-AAYzDRKIrJ3VYV2THleIms7cI

[12] https://www.scientificamerican.com/article/china-invests-546-billion-in-clean-energy-far-surpassing-the-u-s/

[13] https://www.bbc.co.uk/news/business-66435870

[14] https://edition.cnn.com/2023/08/20/economy/china-economy-lpr-cuts-hnk-intl/index.html


It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.

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