For those of you who are paying attention to the Chinese stock market, you may have noticed that it has been taking a hit lately – with US$6.3 trillion in losses and indices hitting five-year lows.
However, if Beijing stock watchers think this is a bad thing, be warned: This may be just a glimpse of what is to come.
As CNBC reported Thursday, stocks in mainland China rose slightly “after remaining near five-year lows” on negative economic data.
The country announced on Wednesday that it had missed GDP growth estimates, growing by 5.2 percent in the fourth quarter of 2023. A Reuters poll had expected a growth rate of 5.3 percent.
“The 2023 macro data show that the Chinese economy is in transition to a new growth model,” said Qiu Zhang, president and chief economist of Pinpoint Asset Management.
He said: “With the decline in investment in the real estate sector, the economy has become more dependent on the manufacturing sector and the service sector.”
“This transformation will take some time to accomplish. The main question in the market is when the transformation in the real estate sector will end.
The so-called “turnaround” in the “real estate sector” – which is a nice way of saying that China's booming construction economy has gone bankrupt, with overcapacity, ghost towns, major bankruptcies, and financial distress among developers – has been one of the trends dragging China and Hong Kong's markets plummeting. Kong is worth more than $6.3 trillion since its peak in 2021.
“Gloomy milestones have continued to pile up in recent days: Tokyo has overtaken Shanghai as Asia’s largest stock market, while India’s valuation premium over China has reached a record high,” Bloomberg reported on Friday.
“Domestically, a collapse in Chinese stocks is wreaking havoc on the country's asset management industry, pushing mutual fund closures to their highest level in five years.”
Moreover, officials in Beijing have ruled out a stimulus package to halt the slide.
“What we're seeing this year so far is really a continuation of what we saw last year,” John Lin, chief investment officer at Chinese equity firm AllianceBernstein, said in a Wednesday interview with Bloomberg.
“Stimulus policies of this kind of pressure have so far been unable to change the fundamental fundamentals from the bottom up in areas like real estate.”
It is not just the real estate sector that is looming over the Chinese economy in the short term. Deflation also remains a major issue, and Sino-US relations have affected trade and the illusion of political stability in Chinese investments. Although Chinese Premier Li Qiang bragged that the country had achieved the goal of 5% annual GDP growth without a stimulus package, during his remarks at the World Economic Forum in Davos, Switzerland, last week, investors did not seem reassured.
“The government seems very optimistic about the economy,” said Chen Yao Ng, investment director for Asian equities at ABRDN Bank.
“The market may not even trust the 5% growth rate, it certainly has a more negative view on the economy and certainly believes Beijing needs a big fiscal response.”
And perhaps so – because as bad as the short-term problems are, Beijing's larger capital problem looms in the not-so-distant future.
In addition to poor economic data to close out the year in China, there was also negative demographic data: For the seventh year in a row, births in China declined, leaving the country's population at an accelerating rate of decline, according to MarketWatch.
Population decline has multiple impacts on the economy, none of which are particularly good. However, what those who watch the Chinese stock market will be watching closely is what is known as the “middle youth ratio.”
As MarketWatch points out, the index is one of the most accurately correlated indicators of stock market health, according to numerous studies. It's a relatively simple equation: Divide a country's middle-aged population, aged 35 to 49, by the young population, aged 20 to 34.
When the ratio rises, the stock market tends to rise. When it goes down, the stock market tends to do the same thing.
China's MY ratio is still rising – for now. That's one reason why Alejandra Grindal, chief economist at Ned Davis Research, says Chinese markets are enjoying “positive tailwinds.” However, if trends continue, this will continue until 2031, when the ratio will start to decline.
Now, the implications of this are long-term, and it's worth noting: “In the period 20 to 34 years from now, the size of China's young adult population will be the denominator in the MY ratio, and a smaller denominator translates to a larger ratio. . . . In other words, Last year's decline in births should not negatively impact Chinese stocks for another 35 years — in 2059,” MarketWatch noted, though the market won't get the same boost from the MY ratio it currently does after 2031.
However, the MY ratio is another red flag that Beijing may have created the Potemkin village of an economic powerhouse. Ghost towns dot the country, a physical symbol of the country's excessive real estate construction practices.
The country's one-child policy, although now abandoned, means that many of the elderly population will have to care for one child – increasing the productivity of the workforce. Moreover, as the Nikkei Asia Index points out, many of the younger generation have chosen to move away from the overachieving mentality that has driven much of China's economic boom, opting for a “lay back” lifestyle of slow achievement.
The harsh political situation has discouraged many companies from intervening in the Chinese market – and the specter of war with Taiwan turning China into a pariah state could quickly derail the stock market. As the South China Morning Post noted in a December article, the Chinese yuan is not only suffering from deflation, it is also showing signs of volatility, leaving policymakers with limited room to use monetary policy to support the situation in the short term.
So, no, the MY ratio is not about to arrive tomorrow. However, given the brewing storm in what was supposed to be the global economic powerhouse of the 21st century, it is bleak news to bear in mind in the months and years ahead.
This article originally appeared in The Western Journal.
