The Bottom Line:
- Chinese real estate sales have dropped by $830 billion since 2021, the largest decline in the last decade.
- The Chinese stock market has dropped by around 60% since its all-time high in 2021, mirroring the 2008 financial crisis in the United States.
- Chinese stocks have become significantly undervalued, with a forward price-to-earnings ratio under 10, similar to the US stocks during the 2008 crisis.
- Chinese companies are now more profitable, with expanding profit margins, suggesting a potential recovery in the Chinese stock market.
- The recovery of the Chinese real estate market is crucial for the overall recovery of the Chinese economy and the stock market.
Plummeting Real Estate Sales in China
The Staggering Decline in Chinese Real Estate Sales
Chinese real estate sales have experienced a dramatic decline since 2021, with the total value of sold real estate plummeting from around 17.5 trillion Yuan to approximately 12 trillion Yuan in 2023. This represents the largest drop in the last decade, amounting to a staggering $830 billion decrease in sales, which is larger than the GDP of Poland. The Chinese stock market has also suffered, with its value falling by around 60% since its all-time high in 2021.
Comparing the Current Chinese Market to the 2008 US Financial Crisis
The current situation in China bears striking similarities to the 2008 financial crisis in the United States. The US stock market also experienced a 60% decline due to a real estate crisis. In retrospect, the 2008 crisis presented a golden opportunity for investors to purchase cheap stocks. The question now arises whether the current state of the Chinese market offers a similar setup or if there is more trouble on the horizon for China.
One key similarity between the current Chinese market and the post-2008 US market is the low valuations of Chinese stocks. The forward price-to-earnings ratio of the Chinese stock market is now below 10, a level that US stocks also reached at the height of the financial crisis. Such low valuations are relatively rare in recent history, with the average PE ratio over the last 20 years being above 15. If Chinese stock valuations were to reach a PE of 15, it would result in a more than 50% increase in Chinese stock prices.
Profitability and Recovery Signs in Chinese Stocks
Despite the pessimism surrounding Chinese stocks, Chinese companies have become much more profitable, with profit margins expanding significantly since last year. This reversal from the period between 2021 and 2023 is a positive sign, as more profitable companies tend to command higher valuations. If this trend continues, it could eventually lead to higher valuations for Chinese stocks.
The profitability of US corporations in 2008 also experienced a sharp rebound at the end of the downturn, which was a strong indicator for US stocks, signaling to investors that the worst was likely behind them. This is a typical behavior during economic slowdowns, as profit margins get squeezed, forcing businesses to cut costs. Once the downturn is over, profit margins tend to expand, which is what we are currently observing with Chinese stocks.
Mirroring the 2008 US Stock Market Crash
Similarities Between Chinese Stocks Today and US Stocks Post-2008
The current state of the Chinese stock market shares clear similarities with the US stock market in 2009. Both markets have experienced cheap valuations and increasing profitability. The Shanghai Composite has recently managed to break above a downward trend line that it had been under since 2021, although the recovery may not appear substantial yet.
The Struggle of Chinese Real Estate and Its Impact on Stocks
Despite the similarities, China is not entirely out of the woods. The Chinese real estate market is still struggling, with the real estate index showing little signs of recovery. Historically, Chinese stocks have not fully recovered without the real estate market improving. Chinese property prices are falling at the fastest rate since 2015, which directly affects consumer confidence and spending habits. Property ownership is highly valued in China, and when people see their main asset losing value, they become more cautious about spending. As a result, Chinese companies are unlikely to see a significant increase in revenue.
Potential Signs of Recovery in the Chinese Economy
One encouraging signal is the Chinese government’s recent announcement to support the weakening property market. Government measures and fiscal injections could help restore confidence in the real estate sector and stabilize the market. However, the Chinese credit impulse, a major driver of the Chinese economy, is not showing clear signs of recovery. This index measures the change in new credit as a percentage of GDP and is a leading indicator of economic activity and growth. Currently, the credit impulse has been hovering around zero for the last couple of years, suggesting that not enough new credit is being issued to stimulate the economy. This situation could change if significant intervention from the Chinese authorities occurs.
Undervalued Chinese Stocks: A Buying Opportunity?
Recent Price Action and Potential Turning Points
Chinese stocks have recently made a notable move upward, bouncing by over 30% and breaking above a key downtrend line. Prices have managed to clear two key moving averages that can act as tough resistance during downtrends, as seen in 2022 and 2015. This is a promising sign for Chinese stocks, indicating a potential turnaround. To confirm a reversal, prices should ideally hold above these moving averages and use them as support to begin a new uptrend, similar to what occurred in 2016. However, failure to maintain levels above these moving averages could suggest that the vicious downtrend in Chinese stocks is not yet over and that they may face additional downside risk in the coming months.
Gaining Exposure to the Chinese Economy
Investors looking to gain exposure to the Chinese economy have two main options: the MSCI China Index, which can be traded through the ETF MCHI, and the China A50 Index. Both of these indices can be accessed on capital.com. By investing in these indices, investors can participate in the potential recovery of the Chinese stock market and benefit from any positive developments in the Chinese economy. However, it is crucial to keep in mind the risks associated with investing in a market that is still facing challenges, particularly in the real estate sector.
Weighing the Risks and Opportunities
While the current state of the Chinese stock market presents potential opportunities for investors, it is essential to approach the situation with caution. The similarities between the Chinese market today and the US market post-2008 are encouraging, but the ongoing struggles in the Chinese real estate sector and the lack of a clear recovery in the credit impulse suggest that there may be more hurdles to overcome. Investors should carefully consider their risk tolerance and investment goals before making any decisions to invest in Chinese stocks. As with any investment, diversification and a long-term perspective are key to navigating the uncertainties of the market.
Profitability Surge in Chinese Companies
Expanding Profit Margins Amidst Economic Challenges
Despite the pessimism surrounding Chinese stocks, a notable trend has emerged: Chinese companies are becoming increasingly profitable. Profit margins have expanded significantly since last year, marking a significant reversal from the period between 2021 and 2023. This development is particularly encouraging, as more profitable companies typically command higher valuations in the stock market.
The current profitability surge in Chinese companies bears a striking resemblance to the rebound experienced by US corporations during the 2008 financial crisis. At the end of the downturn, US companies witnessed a sharp increase in profit margins, which served as a positive signal for investors, indicating that the worst might be behind them. This pattern is characteristic of economic slowdowns, where businesses are forced to cut costs and streamline operations, leading to improved profitability once the downturn subsides.
Navigating the Challenges of the Chinese Real Estate Market
While the profitability surge in Chinese companies is a promising sign, the country’s real estate market continues to face significant challenges. Chinese property prices are falling at the fastest rate since 2015, directly impacting consumer confidence and spending habits. In China, property ownership is highly valued, and when people perceive their primary asset as losing value, they tend to become more cautious about spending.
This decreased consumer confidence is evident in a recent survey, which reveals that Chinese consumer confidence has reached its lowest level in the past 40 years. As a result, Chinese consumers are less likely to spend significantly, which, in turn, may hinder Chinese companies from experiencing substantial revenue growth. The revenues of Chinese stocks are currently in a strong downtrend, recently reaching the lowest level in over two decades.
Potential Government Intervention and Market Recovery
Amidst the challenges faced by the Chinese real estate market, there are glimmers of hope for a potential recovery. The Chinese government has recently announced its intention to support the weakening property market through various measures and fiscal injections. These actions could help restore confidence in the real estate sector and stabilize the market.
However, the Chinese credit impulse, a key indicator of economic activity and growth, has not yet shown clear signs of recovery. This index, which measures the change in new credit as a percentage of GDP, has been hovering around zero for the past couple of years, suggesting that the current level of new credit issuance may not be sufficient to stimulate the economy. A significant intervention from the Chinese authorities could potentially change this situation and provide the necessary boost to the credit impulse.
The Crucial Role of the Real Estate Market in China’s Recovery
The Vital Importance of Real Estate in China’s Economic Recovery
The real estate market plays a pivotal role in China’s economic recovery, as it is deeply intertwined with consumer confidence and spending habits. The recent decline in property prices, falling at the fastest rate since 2015, has had a significant impact on the overall economy. As property ownership is highly valued in China, changes in real estate prices directly affect how people perceive their financial well-being. When the value of their primary asset declines, consumers become more cautious about spending, leading to a decrease in overall economic activity.
Government Intervention and the Potential for Market Stabilization
Recognizing the crucial role of the real estate market in the country’s economic recovery, the Chinese government has recently announced its intention to support the weakening property sector. Through various measures and fiscal injections, the government aims to restore confidence in the real estate market and stabilize prices. These actions could provide a much-needed boost to consumer confidence and spending, which, in turn, would benefit Chinese companies and the overall economy.
The Relationship Between the Credit Impulse and Economic Growth
Another key factor in China’s economic recovery is the credit impulse, which measures the change in new credit as a percentage of GDP. This index serves as a leading indicator of economic activity and growth. When the credit impulse is positive, it suggests an increase in new credit, which typically leads to higher economic activity and GDP growth. However, the Chinese credit impulse has been hovering around zero for the past couple of years, indicating that the current level of new credit issuance may not be sufficient to stimulate the economy. A significant intervention from the Chinese authorities could potentially change this situation and provide the necessary boost to the credit impulse, further supporting the country’s economic recovery.
