China's Stock Gutted with Brutal Loss of Over $6 Trillion - This Isn't Beijing's Only Problem
For those of you who pay attention to China’s stock market, you may have noticed that it’s getting battered as of late — with $6.3 trillion U.S. in losses and indices hitting five-year lows.
If stock-watchers in Beijing think this is bad, however, they ought to be warned: It could be just a taste of what’s to come.
As CNBC reported Thursday, stocks in mainland China rose slightly “after languishing near five-year lows” due to negative economic data.
On Wednesday, the country announced it had missed GDP growth estimates, growing by 5.2 percent in the fourth quarter of 2023. A Reuters poll had anticipated a growth rate of 5.3 percent.
“Macro data from 2023 shows China’s economy is going through a transition to a new growth model,” said Zhiwei Zhang, a president and chief economist at Pinpoint Asset Management.
“With investment in the property sector falling, the economy is more dependent on the manufacturing sector and service sector,” he said.
“This transition will take time to be accomplished. The key question in the market is when the transition in the property sector will finish.”
The so-called “transition” in the “property sector” — a nice way of saying that China’s boom construction economy has gone bust, with overcapacity, ghost cities and major bankruptcies and money crunches among developers — has been one of the trends dragging Chinese and Hong Kong markets down more than $6.3 trillion since their 2021 peak.
“Grim milestones have kept piling up in recent days: Tokyo has overtaken Shanghai as Asia’s biggest equity market, while India’s valuation premium over China has hit a record,” Bloomberg reported Friday.
“Locally, a meltdown in Chinese shares is wreaking havoc on the nation’s asset management industry, pushing mutual fund closures to a five-year high.”
What’s more, officials in Beijing have ruled out a stimulus package to stop the slide.
“What we are seeing this year so far really is a continuation of what we saw last year,” said John Lin, AllianceBernstein’s chief investment officer of China equities, in a Wednesday interview with Bloomberg.
“These squeezing-the-toothpaste type of stimulus policies so far haven’t been able to turn around the underlying bottom-up fundamentals of areas like the property sector.”
It’s not just the property sector that looms over the Chinese economy in the short haul. Deflation also remains a major issue, and Chinese-U.S. relations have affected both trade and the illusion of political stability in Chinese investments. And, while Chinese Premier Li Qiang boasted that the country hit its 5 percent yearly GDP growth target without a stimulus package during remarks at the World Economic Forum in Davos, Switzerland, last week, investors didn’t sound reassured.
“The government seems very sanguine about the economy,” said Xin-Yao Ng, investment director for Asian equities at abrdn.
“The market might not even trust the 5 percent growth figure, it certainly has a much more negative view on the economy and definitely believes Beijing needs a big fiscal response.”
As well it might — because, as bad as the short-term problems are, Beijing’s bigger capital problem looms in the not-too-distant future.
In addition to the bad economic data to close out the year in China, there was also negative demographic data: For the seventh year in a row, births fell in China, leaving the country’s population in an accelerating rate of decline, according to MarketWatch.
Population decline has multifarious effects on an economy, none of them particularly good. However, the one that those closely watching China’s stock market will be keeping a close eye on is what’s known as the “Middle-Young Ratio.”
As MarketWatch notes, the indicator is one of the most accurately correlated with a stock market’s health, as per numerous studies. It’s a relatively simple equation: divide a country’s middle-aged population, those between the ages of 35 to 49, by its young population, ages 20 to 34.
When the ratio is rising, the stock market tends to rise. When it declines, the stock market tends to do the same.
China’s MY Ratio is still rising — for the moment. It’s one of the reasons why Alejandra Grindal, Ned Davis Research’s chief economist, said Chinese markets have had “positive tailwinds.” However, if trends hold, that will only continue until 2031, when the ratio starts declining.
Now, the implications of this are long-term, it’s worth noting: “Between 20 and 34 years from now, the size of China’s young-adult cohort will be the denominator of the MY Ratio, and a smaller denominator translates to a larger ratio. In other words, last year’s lower births shouldn’t negatively impact Chinese equities for another 35 years — in 2059,” MarketWatch noted, although the market won’t be getting the same boost from the MY Ratio that it currently is after 2031.
However, the MY Ratio is yet another red flag indicating that Beijing may have created a Potemkin village of an economic powerhouse. Ghost cities litter the country, a physical symbol of the country’s over-exuberant real-estate building practices.
The country’s one-child policy, although now abandoned, means many in its aging population will have to be taken care of by a single child — taking more productivity out of the workforce. Furthermore, as Nikkei Asia notes, many in the younger generation have opted out of the overachievement mindset that drove much of the Chinese economic boom, choosing a “tang ping” — or “lying flat” — lifestyle of slacker underachievement.
The draconian political situation has dissuaded many companies from going all-in on the Chinese market — and the specter of a war with Taiwan turning China into a pariah nation would effectively derail its stock market in a hurry. And, as the South China Morning Post noted in a December article, not only is the Chinese yuan experiencing deflation, it’s also displaying signs of volatility, leaving policy-makers limited space to use monetary policy to shore up the situation in the short term.
So, no, the MY Ratio isn’t about to hit tomorrow. However, given a growing storm in what was supposed to be the world’s economic powerhouse in the 21st century, it’s more grim news to consider in the months and years ahead.
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