Recent data have pointed to an economic slowdown in China, with its post-COVID reopening of trade not yielding the booming results many expected.
On July 10, the flat reporting of China’s consumer price inflation in June — a 28-month low — prompted worry among some over the possibility of deflation, according to The Wall Street Journal.
While China saw a 4.5% uptick in economic growth in Q1, the country’s economy started singing a different tune in the months that followed. Chinese stocks are lagging far behind other major markets, retail sales have been sluggish, and volumes of factory output and exports have underperformed.
In light of the relative cooldown, Chinese authorities could take interventionist measures to jump-start the economy for the second half of 2023 or at least mitigate short-term risk, claimed Matt Orton, chief market strategist at Raymond James Investment Management.
“Coming out of zero Covid, it’s definitely been disappointing,” Orton remarked, according to WSJ. “But good enough that it hasn’t derailed the global growth story.”
So far, the United States has not been impacted by the softening of the world’s second-largest economy, with U.S. stocks with high revenue exposure to China performing reasonably well.
For instance, Nvidia shares tripled and now sit at the top of the S&P 500’s leaderboard, and the PHLX Semiconductor Sector Index climbed 44% in 2023. Whether the dynamic persists is uncertain.
As previously reported by The Dallas Express, Treasury Secretary Janet Yellen recently wrapped up a diplomatic visit to China in a bid to shore up the worsening ties between the two nations. Alongside the United States and China finding themselves at odds over Russia’s invasion of Ukraine, Taiwan’s independence, and alleged Chinese spy balloon operations over American soil, there have also been trade disputes over tariffs.
Worsening relations between the United States and China have not gone unnoticed by global investors who, in 10 consecutive weeks, have withdrawn millions from Chinese equity funds, according to the WSJ.
Despite the escalating geopolitical tensions, many U.S.-based companies rely on China’s massive market as a driver of growth. Apple, Wynn Resorts, Texas Instruments, Las Vegas Sands, Chevron, and Qualcomm all have substantial business stakes in China.
More broadly, FactSet reports that approximately 7.6% of S&P 500 revenue originates from China, according to WSJ. That figure stands at 16% for the IT sector and 6.8% for consumer discretionary stocks.
“Trends toward higher unemployment and weaker consumer confidence are going to have downstream implications on U.S. companies that do business there,” said Greg Bassuk, chief executive of ASX Investments, WSJ reported.
Bassuk pointed to businesses in the energy and travel sectors as most at risk of facing challenges in terms of sales and profits.
With the pressure dialed up, how Chinese policymakers will respond to the country’s lackluster economic performance remains to be seen. Whether or not the economy rallies in the second half of 2023 will be watched closely by American investors.
Wall Street is predicting a 7.2% fall in S&P 500 company earnings from a year ago, reported WSJ.
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