China Deflation? These Stocks Showed Growth in Consumer Demand
China recently reported a 0.5% decrease in its consumer price index (CPI) compared to the previous year, marking the steepest decline since November 2020. This development has reignited concerns about potential deflation.
However, there's a silver lining for every piece of bad news: Beijing has prioritized economic growth for 2024, and investors are eagerly anticipating the stimulus policies that will be unveiled at the upcoming Central Economic Work Conference later this month.
Nevertheless, it's important to verify this trend by examining the actual performance of consumer companies.
Low CPIs and subdued consumer demand typically impact the performance of consumer-facing stocks, which fall into two categories: staples and discretionary.
Staples, considered more resilient, include essential products such as food, beverages, and household goods, which remain in demand regardless of economic conditions.
In contrast, discretionary consumer goods — like branded apparel, entertainment, leisure activities, and even cars — are non-essential. Consumers may postpone their purchase to save money.
While it's typically expected that deflationary pressure would impact discretionary sectors more severely than staples, recent share price trends suggest a different scenario. The Global X MSCI China Consumer Staples ETF (CHIS) actually declined more than the Global X MSCI China Consumer Discretionary ETF (CHIQ), with the former down 27% year-to-date compared to the latter's 17% decline.
Further investigation into the top 10 holdings of CHIS reveals some anomalies. For example, stocks like Kweichow Moutai, although classified as staples, are premium brands not typically consumed daily by the average person.
Meanwhile, the CHIQ holdings also present some contradictions. E-commerce platforms like Alibaba and JD.com are classified as consumer discretionary, yet they offer daily necessities as well. The distinction isn't always clear-cut.
Additionally, PDD, a discount group buying platform, might actually see increased demand during periods of low consumer confidence. Also, PDD's share price has surged by 69% year-to-date, surpassing Alibaba in market cap and contributing to CHIQ's overall performance.
This analysis shows that classifications don't perfectly reflect the nuances of China's consumer spending. A more detailed comparison is required.
Looking at the baijiu sector, top brands like Moutai, Wuliangye, and Luzhou Laojiao have all seen double-digit growth in revenue and profits in the first nine months, contradicting the narrative of weak consumer demand. However, their share prices have fallen, with Wuliangye experiencing the most significant drop of 22%.
E-commerce platforms show mixed results. JD.com reported a 3% revenue decline, Alibaba grew slightly by 2%, but PDD achieved impressive growth, with revenue and profits up 65% and 56%, respectively. This success, presumably driven by its international expansion through Temu, indicates that China's e-commerce sector may be experiencing a slowdown.