For the first time since January, the People’s Bank of China lowered interest rates on Monday to 2.75% or by 10 basis points.
The goal: to stimulate China’s slowing economy.
Recently the Chinese government reported that July’s industrial production rose 3.8% year-over-year compared to the 4.6% expected. It is also slightly lower than the 3.9% rise reported in June. And while retail sales increased 2.7% in July year-over-year, it was 5% below what was expected.
In addition, China’s jobless rate for 16-24 year-olds hit 19.9%, which is the highest ever recorded, and new home prices were down almost 1% year-over-year compared to being down 0.5% last month.
As reported by the Associated Press, Chinese government spokesman Fu Linghui said, “The momentum of economic recovery has slowed. More efforts are needed to consolidate the foundation of economic recovery.”
As a result, Chinese markets held their breath with the Shanghai Composite mostly flat, the Hang Seng was down 0.5% and Chinese bond yields traded lower.
So, the question is… is it time to start bargain hunting in Chinese stocks?
That’s exactly what we will tackle in today’s Market360. But first, it’s important to understand how China got here.
China’s Big Problem(s)
From the onset of the global COVID-19 pandemic, China has taken some of the strictest measures to stamp out the virus. And, while the rest of the world is starting to lax their COVID-19 policies, China is still taking a “zero-COVID” approach, which is leading to citywide shutdowns resulting in factories and plants closing across the country.
We’ve felt the pain of these shutdowns here in the States. As China is a large producer of semiconductor chips used to make our electronics and cars, we’ve seen delays in products coming to market, limited supply, and surging prices. And the dominos haven’t stopped falling.
As part of the Inflation Protection Act just signed by President Joe Biden this week, there are now a lot of monetary incentives for people to “go green”— buying electric vehicles (EV) and investing in solar energy.
And who is the largest maker of the parts for those green technologies? That’s right, China.
While the Act does have stipulations about where the tech must be produced (hint: in the U.S.) in order to qualify for the incentives, right now car and tech companies are reliant on China to make it work.
On top of that, China is experiencing a real estate crisis that could be catastrophic.
As I mentioned, housing costs in China fell almost 1% year-over-year in July, the first fall after six-consecutive years of rising…
While 1% might not seem like a huge drop, the fact is China is the largest real estate market in the world.
And it’s not just personal family homes we are talking about here. Apartment sales from the country’s largest builders have fallen for 13 months straight. Hundreds of buildings that were presold are sitting unfinished. As a result, some homeowners stopped paying their mortgages on unfinished properties. As reported by The Washington Post, these boycotts have started to raise concerns that the Chinese property market is going to collapse, “a scenario that would undermine the nation’s financial system and have ripple effects for the global economy.”
The report continues:
For more than a decade, construction and real estate have helped fuel China’s astounding economic growth and bolstered an emerging middle class, underscoring the significance of the mortgage crisis and the damage the unraveling crisis could unleash.
And to be clear, the fall in Chinese real estate and China lowering its rates does not mean the country has been immune to inflation. The Chinese people are feeling the pinch just like the rest of us.
In fact, as reported by Bloomberg:
Recent surveys show Chinese households are more pessimistic about future income growth than they’ve ever been—even at the pandemic’s start in 2020 or after the global financial crisis. That’s motivating them to cut back debt and beef up savings, a trend that could depress economic growth for years.
What the reduction in rates does tell us is that the Chinese government sees their slowing economy as a bigger issue that the current rate of inflation.
Which brings us back to the original question…
Is It Time To Buy Cheap Chinese Stocks?
The short answer is no.
Yes, this year I’ve been pounding the table that there is some great opportunity in the markets as they whipsaw back and forth. And we’ve been able to pick up some great companies at a discount in the process.
But when you leave the U.S. that is not the case. First of all, folks, right now the dollar is very strong compared to currencies around the world. With so much opportunity in U.S. markets, it doesn’t make sense to take on currency risk in other countries… especially China.
Second, leadership in China is unpredictable. They go to war with their own companies, and they destroy those who don’t cooperate. The Communist Party wants to pick the winner and, frankly, I don’t have a source there.
Additionally, with continued lockdowns and the resulting factory shutdowns plus the faltering real estate market, there is too much risk.
In a note written by Morgan Stanley Economist Seth Carpenter, he said:
Recent policy action to address the housing crisis will help, but I fully expect that a much larger package will be needed. Ultimately consumer and property confidence will need to make a rapid recovery if the rebound can take shape.
So, for now, we won’t buy China.
Instead, at Growth Investor, I’ve compiled some of the best stocks to buy. My average Growth Investor stock is characterized by 63.1% average annual sales growth and 442.2% average annual earnings growth are uniquely poised to profit in our current market environment.
To learn more and get in on the action, simply go here.
Sincerely,
Louis Navellier
P.S. Mark your calendar for Friday, August 19. A huge financial event is coming down the pike, one that could turn some stock market investors into millionaires – while bankrupting others.
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It doesn’t matter if you have $500 or $5 million… I’ll show you how to prepare.
It’s free to watch and by doing so I know you’ll be ahead of everyone else struggling to understand what is really going on.
