Chinese stocks sending scary signal about the economy

Hong Kong

AS exporters feel the heat of the trade war, China's powerful domestic-consumption engine was supposed to provide some protection for investors in the nation's stocks.

That's not working out so well. A narrative that's captured traders' attention in recent weeks has been a "consumption downgrade" in the world's second-biggest economy. With official data already showing retail sales growth slowing, investor alarm increased when China's biggest liquor maker, Kweichow Moutai Co, reported its weakest profit expansion in almost three years.

Moutai alone lost 212 billion yuan (S$42.3 billion) in market value over six days last month. And stocks of companies that sell less discretionary items have done even worse. The Shenzhen CSI 300 Consumer Staples Index slid 22 per cent in October, its worst month since the 2008 global financial crisis.

Dai Ming, a fund manager at Hengsheng Asset Management Co in Shanghai, is among those who have bailed on China's consumer story for now. He sold off his portfolio of those stocks earlier this year, in favour of financials.

"We haven't figured out the reason clearly" for the apparent changes in spending habits, Mr Dai said. Among the explanations market players cite:

The earnings from Moutai, which makes the baijiu liquor that's often prized as a luxury gift, were "concrete proof of China's consumption-growth slowdown", Mr Dai said. The next key tests will be Single's Day, a shopping bonanza promoted by online retailing giant Alibaba Group Holding Ltd, and spending over the Chinese New Year holidays, he said.

Bloomberg Intelligence analysts remain cautious on the prospects for spending during Single's Day, noting that Chinese online appliance sales were weak in October.

Investors aren't the only ones worried about China's consumers. Authorities are taking steps to shore up spending - all the more so with trade tensions sending manufacturing gauges to the weakest levels since the economy's 2015-2016 hard-landing scare.

A slowing car market has been one major reason for the deceleration in retail sales this year, and China's top economic planning body is proposing to halve the tax on car purchases to 5 per cent, Bloomberg News has reported. Personal income-tax cuts are also on the table.

"There are likely to be more actions," predicted Laura Wang, a China equity strategist at Morgan Stanley in Hong Kong.

"For now we still look at this as a relatively short-term cyclical consumption momentum slowdown instead of a longer-term structural decline," she said. Improvements could come as soon as the first quarter of 2019, she said.

Still, she recommends tilting toward materials and energy companies at the moment. "We do not recommend adding exposure to broad consumption-related sectors", such as cars and retailing.

Among the consumer-related companies that showcase the reason for caution:

Chinese consumer stocks have wiped out US$302 billion in market value as at Thursday from June 12, when the discretionary and staples sectors of the CSI 300 Index reached recent highs, according to data compiled by Bloomberg.

Both groups climbed on Friday, as did all the CSI 300 sectors, as a rally took hold on news US President Donald Trump asked his Cabinet to draft a potential trade deal, following a phone call with counterpart Xi Jinping.

Pending hard news on a trade deal, though, some say China's consumers have been in a funk.

"People haven't been this pessimistic in over a decade - consumers' confidence is weak and they dare not spend money," said Lin Jinghua, an analyst at Capital Securities Corp. "We may have to wait until the end of mid-term elections in November and the G-20 meeting" for any shift in sentiment, the analyst said, referring to this week's US congressional elections and the subsequent planned meeting between Mr Trump and Mr Xi. BLOOMBERG