Why is the China Recovery Stalling and What's Next?

A choppy recovery vs. high investor expectations

“Traders had it wrong from the beginning of this. There was a lot of excitement back when the zero covid band-aid was pulled off in November and December. And there was this idea the economy is reopening. Yes the economy was reopening but it wasn’t reactivating.” Leland Miller, CEO of China Beige Book

On CNBC Asia this morning, I attributed half of the China market declines this year to the U.S.-China relations.

What about the other half?

I think it’s due to a combination of an uneven recovery and high investor expectations.

Here is my summary of Wall Street’s outlook for China, dated January 7, 2023. Some pretty bullish forecasts back then.

“I Told You So”

“The [market] volatility reflects uncertainty in China’s reopening and the real restate recovery… This means the stock market could run ahead of the fundamental recovery or behind it.” Qi Wang, December 2022

I don’t like to be a smart ass. But I did warn about a choppy recovery even before China’s reopening. The following conversation took place in December 2023.

In March 2023, I also wrote a three-part series on China investment risks.

Recovery Road Bumps

China’s current economic challenges are:

• Low confidence everywhere

• “Technical factors” such as certain labor shortages and a slow resumption of international flights

• Lack of government policies

The confidence issue pertains to consumer confidence, business confidence, real estate confidence and investor confidence. Today, I am not only concerned with a short-term confidence crisis in China, but also worry about permanent damage in the long-term.

A notable sign of low confidence is the significant deflationary pressure currently, with CPI +0.1% and PPI -3.6% in April. I expect deflation to continue in May.

Confidence is such an important topic that I will expand on this separately.