Growth Dragons Weekly: China Stocks Fizzled Out (Again)

In Growth Dragons this week:

1. China Stocks Fizzled Out (Again)

2. China Negatives (Old Problems Revisited):

   1. China Property Woes Unresolved: Country Garden Being the Latest Casualty

   2. Dual Circulation, Not: Export Slowdown + Weak Domestic Demand

   3. US’s Hostility Against China: Chip Investment Bans

3. China Positives (Fundamentals Aren’t That Bad):

   1. China Retail Properties Posting Good Results

   2. Alibaba Back On Growth Trajectory

   3. China Allowing Group Travel, Loosening Policy Grip Further

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1. China Stocks Fizzled Out (Again)

'Nothing tests your conviction like plummeting stock prices,' remarked Ian Cassel, the founder of MicroCapClub. Chinese stock investors, however, endure more than just the decline in stock prices; they have also experienced delayed recoveries and many false rallies for almost three years.

China stock investors must be feeling like a volleyball, as they have experienced a cycle of false hopes, repeatedly tossed into the air only to be smacked down again. The same has happened in the past two weeks. Politburo's pledge to invigorate the economy initially sent shares higher but in the past one week, the enthusiasm waned and stocks got sold down once more:

Many investors have given up and dumped their China shares. It is definitely not easy to have the conviction to hold onto China stocks when the media bombards bad news frequently and the prolonged lackluster stock performance has also removed any shred of patience left in the investors.

At Growth Dragons, we stand as one of the few remaining bastions that persist in recognizing the enduring potential of China stocks. If your perspectives align with ours and you seek support in your investment journey, we extend an invitation to stay here. Count on us to stand by your side.

2. China Negatives (Old Problems Revisited)

In this week’s report, we have grouped the events and analyses into negatives and positives for China. Let’s get the negatives out of the way and we will end on a positive note.

China Property Woes Unresolved: Country Garden Being the Latest Casualty

There has been a number of high profile defaults by China real estate developers in 2021 and 2022. However, there has been relative quietude for approximately a year, with no significant issues reported among major developers, until the emergence of the Country Garden predicament.

Country Garden recently failed to make an interest payment totaling US$22 million. While it technically doesn't carry the label of a default due to its grace period of 30 days for rectifying the payment, market sentiment leans toward the belief that Country Garden is unlikely to recover.

The prices of two bonds associated with Country Garden, on which payment defaults occurred, plummeted to just 8 cents on the dollar. In other words, 92% of the bond's principal value has been wiped out. Few daring individuals are inclined to invest in these bonds under such circumstances.

The share price of Country Garden (SEHK:2007) also experienced a sharp decline, plummeting by nearly 30% over the past week. It concluded at a value below HK$1, marking an all-time low for the company's shares.

What's truly startling is that Country Garden was once hailed as one of the more financially sound developers. However, its current predicament raises concerns that many other developers might find themselves in a similar plight. This situation has sparked apprehension within the property sector, and the Chinese government's efforts appear insufficient to fully address the issue.

The most recent step taken involves extending the repayment period for certain outstanding loans by one year. Overall the Chinese Government has been vocal in supporting the real estate sector but no major relief or policy changes have been implemented. It's understandable that numerous investors may have relinquished their patience and divested their China stocks, given that this property crisis has persisted for two years without signs of improvement.

Dual Circulation, Not: Export Slowdown + Weak Domestic Demand

In 2020, the Chinese Government introduced the Dual Circulation strategy (国内国际双循环). Historically, China's economic growth has heavily relied on exports. However, this approach has become increasingly risky due to heightened geopolitical tensions with foreign partners. To mitigate such risks, China has sought to stimulate domestic consumption, encouraging its population to spend and thereby invigorate the economy. The aim is to absorb some of the goods that local factories were unable to export due to reduced foreign demand.

In theory, this strategy holds promise. However, a significant hurdle lies in the fact that the Chinese are renowned for their prudent saving habits. We doubt they will reach the level of spending like the westerners. Achieving such a transformation would necessitate unraveling thousands of years of ingrained Chinese culture and values. Consequently, the potential of domestic consumption alone to entirely rectify China's dwindling export figures appears doubtful.

Truth be told, we saw both China’s export figures and consumer price index falling at the same time in July.

China’s export value by 15% compared to a year ago.

Moreover, domestic consumption isn't providing the desired support, given that the consumer price index experienced a 0.3% reduction. This decline in prices suggests a weakened demand that has led to the lowering of prices. The anticipated effectiveness of the dual circulation strategy seems to have encountered challenges.

Nonetheless, it would be premature to entirely disregard China's potential for consumerism. Later on, we will present statistics indicating that retail spending has indeed exhibited signs of improvement. As previously highlighted, drawing parallels between China and Japan, while predicting a 'lost decade' scenario, might be premature at this point.

China undoubtedly needs to break free from its current stagnation, and a crucial step is to ignite consumer confidence. Chinese citizens tend to lean towards pessimism, saving more when the economic outlook appears bleak.

Their favored investment avenue has traditionally been real estate, but the ongoing wave of defaults has dissuaded many from pursuing this option. This creates a cyclical challenge: as the economic prospects dim and savings rise, the economy in turn faces deeper setbacks. This issue becomes particularly pronounced, especially considering that exports won't likely regain their previous volume due to the heightened geopolitical tensions.

This situation is akin to a confidence game – the objective being to inspire the Chinese populace to increase their spending. It might be necessary for the Chinese Government to revisit their past strategies, such as injecting funds into public infrastructure projects, to invigorate the economy and put more money into the private sector and consumers' pockets. This could potentially serve as a means to catalyze spending and rekindle optimism among Chinese consumers.