THE seemingly relentless decline in prices of Chinese goods amid tepid consumer demand is denting expectations that corporate earnings can revive the flagging stock market. From electric vehicles to fast food, companies are engaging in a battle of promotions aimed at luring customers spooked by dim job prospects and have seen a persistent property slump hurt wealth creation. Consumer prices fell for a third-straight month in December, the longest streak since 2009, deepening concerns about profits and share prices.
“That’s all symbolic of a very weak consumption environment that includes lack of consumer confidence and weak income growth,” said Xin-Yao Ng, an investment director for Asian equities at abrdn. “We are cautious on Q4 earnings across most sectors, and would assume that continues in Q1 unless the government starts doing something massive to support the economy.”
Gauges of consumer stocks were the worst performers on the MSCI China Index since end September. The aggregate market value of companies included in the two consumer indexes has fallen by about US$157 billion since. And the biggest drags on the MSCI benchmark in this span include e-commerce giant Alibaba Group, restaurant operator Yum China and EV maker BYD – which have all offered big discounts.
The world’s second-largest stock market started 2024 on a dismal note, with the MSCI China gauge down more than 4 per cent so far this year. It capped a third straight annual decline in 2023.
“The bigger picture is that the weak demand is leading to a deflationary environment, which particularly bodes ill for businesses that cannot achieve higher volumes with lower prices,” said Daisy Li, a fund manager at EFG Asset Management HK.
Wider discounts
The EV industry has been among the worst hit by intense competition as growth slows, with Chinese makers following the lead of Tesla in lowering prices to boost sales. BYD and local peers including Xpeng and Li Auto have shed billions of dollars in market value in the past few months.
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“Retail prices are falling fast,” Morgan Stanley analysts wrote in their 2024 outlook report for the Chinese EV sector. “While local brands, in general, have fared better than luxury and foreign brands in terms of widening discounts, we expect discounts to further widen into 1Q24 on the back of seasonality effects.” Even China’s vaunted Internet giants have been hit, with Alibaba and JD.com seeing stock prices tumble as they wage a fierce battle for market share. The price war has made US-listed PDD Holdings, operator of discount site Temu, one of the rare bright spots in China’s e-commerce industry.
Observers hope for interest-rate cuts and government spending to help prevent the nation from entering a deflationary spiral.
Fund managers say the next catalyst they are watching is pricing and sales data around Chinese New Year in February, which will offer more clues on consumer confidence. The next few weeks may also be key for policy action, given Chinese leaders will soon gear up for the National People’s Congress. That annual legislative session, held in March, is where the government is expected to announce its official growth target for 2024.
‘No player is immune’
A Morgan Stanley survey conducted late last month suggests seasonally better consumer sentiment ahead of the holidays. However, “sustainability is in doubt amid slowing economic recovery”, its analysts wrote in a note.
Salary cuts and job losses have remained among the top concerns of households, they wrote, adding that the number of consumers anticipating the economy to worsen ticked up by two percentage points from November to 13 per cent.
In all, there is little hope for a quick fix. Citigroup expects consensus estimates to fall for Li Ning Co and Anta Sports Products around the upcoming results season, hurt by foreign competition and pushes into lower-tier cities with cheaper products.
Fast-food firms are still locked in a protracted fight for customers, with some offering full meals for about US$3. It’s difficult to make money at such low prices.
“We expect industry margins to erode until the irrational price war ends,” Kevin Yin, an analyst at JPMorgan Chase & Co, wrote in a note while cutting estimates for Yum China. “No player is immune” to the headwinds created by the nation’s slowing demand growth, he added. BLOOMBERG
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