Everything China is doing to shake Europe

Fears of a possible economic recession in USA And uncertainties about the future of interest rates have been marking the movements of international financial markets for months, which have barely shown any signs of interest in any other matter.

Even the problems that have been plaguing the Chinese economy for several quarters, once the great engine of global growth, have been pushed to the background for a while, without altering the prevailing narrative in a market that has been able to maintain a generally positive tone. However, in recent days certain turbulences have been evident in the European markets that have been in the situation of China its epicenter.

In fact, one of the major exceptions to the general positive tone is reflected in the Chinese stock market itself. This very week, The Chinese CSI 300 Index was at its lowest levels since 2019, after losing 14.4% in just four months. Since its post-pandemic highs, recorded in 2021, the collapse is around 45%.

Even so, Western financial markets, once extremely sensitive to any sign of weakness coming from China, have this time been able to extend their run to new highs, oblivious to The tribulations of the Asian giant.

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“China is no longer what it used to be. “Neither economically nor financially,” says Marian Fernández, head of macro at Andbank Spain. “It’s not that China is unimportant, in fact it occupies second place in terms of GDP worldwide, tied with the Eurozone. But idiosyncratic reasons, such as less confidence in the effectiveness of government policies or in the dynamism of its economy, or questionable intervention in companies or financial markets, have led to significant outflows by foreign investors. Thus, the weight in global portfolios has been drastically reduced,” explains the expert.

The truth is that, after having a much longer and more severe strategy against Covid than most Western countries, China has become a continuing history of unfulfilled promises. Hopes for a quick recovery of its economy have been frustrated by the impact of a deep real estate crisis (with the fall of Evergrande as the greatest exponent) and the weakness of the internal consumption.

The ‘chimera’ of 5%

Confidence in a government support plan capable of revitalizing economic growth has been eroded amid a series of unconnected and low-calibre measures, which have not yielded the expected results. “In the short term, the country faces local and external challenges, with trade tensions and rising tariffs and the difficulty of transition from a business model heavily based on real estate to more innovative ones (electric vehicles, renewable energy, semi-trailers, biotechnology, etc.)”, Fernández observes.

In recent weeks, the succession of negative data on the country’s development seems to have convinced experts and investors that the Xi Jinping government’s objective of 5% GDP growth is little less than a pipe dream. A situation that, while not enough to truncate the general good tone, has begun to filter through significantly. in certain market niches whose prospects have been overshadowed by the persistent Chinese storm.

One of the most directly affected is, undoubtedly, the raw materials marketThe Bloomberg Commodity Index is currently also trading around its lowest levels since 2021.

Bloomberg Commodity Index Hits Lows Since 2021

If during the last few decades, the expansion of the Chinese economy has been a key factor in the demand for all types of basic resources, its recent sluggishness has been strongly felt in the evolution of products such as oilwhich this week hit its lowest levels in three years on the market.

Prices of metals such as copper or iron ore have also been hit hard in recent months, in movements that are difficult to explain, except by the deterioration of Chinese demand. Not in vain, the China Baowu Steel Group Corp, the largest steel company in the world, recently warned of a “harsh winter” in the industry that could lead to a crisis worse than those experienced in 2008 and 2015.

Despite this, some firms are confident that the energy transition process that China has embarked on may end up generating a need for basic resources capable of returning a positive boost to the market.

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Meanwhile, beneath the general picture, the stock markets are increasingly showing evidence of the impact that China’s problems are having on different companies and sectors. “The economic weakening in China is a burden for companies with greater exposure to sales in the country in Europe or the US,” says Patricia García, managing partner at MacroYield and director of the master’s degree in finance at ESIC Business & Marketing School, who points out that these companies are also penalized by the succession of trade battles in which the Asian country is being immersed and a Growing detachment of the country’s consumers towards Western products.

In these conditions, a good number of European and American companies have recently chosen to reduce their exposure to the Chinese market. Thus, in the EuroStoxx, the percentage of sales coming from China It currently stands at around 6.2%, compared to 8.8% a year ago.“This downward trend has a particularly negative impact on profit growth estimates, as analysts have been focusing on the growth potential of these companies in a market that until very recently had been providing great promise,” García observes.

For its part, In the USA the exposure is somewhat greaterslightly above 7%, largely due to the technology sector, which accounts for 15% of its sales in China despite the growing trade barriers – both from the US and in China itself – that it has been facing in recent years.

The puncture of luxury

Logically, one of the most affected industries is that of basic featureshit precisely by this lower demand and the fall in pricesmaking it the worst performer of the year in the pan-European Stoxx 600 index.

Another sector that has shown the most concern about the situation in China is the luxury sector. Until recently considered one of the great bastions of the European stock markets, with companies such as LVMH at the forefront, the industry has seen its growth expectations curtailed by the sluggish consumption of Chinese customers, a fundamental part of its business (a few years ago, the consultancy Bain & Co predicted that by 2025 almost half of the world’s consumers would be in China). all luxury purchases (would come from Chinese consumers).

An index of European companies specialising in luxury goods, compiled by Goldman Sachshas accumulated falls of around 22% in the last six months, the equivalent of a loss of 250 billion euros, in which companies such as LVMH (Louis Vuitton, Tiffany, Dior…) or Kering (Gucci) have played a key role. They have accumulated losses of around 30 to 45%respectively, from their annual highs, after seeing their profit estimates for the coming years severely curtailed.

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Similarly, the Chinese storm has also recently made itself felt in the automobile sector, which has experienced a few days of tension in recent days, given the collapse of BMW. Although the German manufacturer has been affected by a problem in a braking system The company accompanied its announcement with a warning about the weakness of its sales in the Chinese market, which will force it to recall 1.5 million vehicles.

“He profit warning announced by BMW “It is recently an example of the problems that are already being reflected in some companies and, as we say, this also has an impact on estimates of future profits, with China being one of the markets with the greatest growth potential and facing threats on different fronts,” notes Patricia García.

The sector, which is moving in the area of ​​annual lows after the recent falls, is affected by the situation in China in many different ways. In its case, in addition to the effects of the economic slowdown, there is a loss of market share to local rivals (which have a price advantage that is even more appreciated in times of economic difficulty), and which are now also taking their threat to the European market itself.

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Large consumer companies, such as food giant Nestlé or spirits distributor Pernod Ricardhave also seen their most recent business figures affected by the slowdown in their sales in China.

In the case of Spain, there are few companies with a significant presence in this market and, in the most significant cases, such as that of Grifols, their business model is apparently less exposed to economic cycles of the Asian giant.

More cyclical, however, is Inditex’s businesswhich had, at the end of its 2023 financial year (which covers until January 31, 2024), 192 stores in mainland China, making it the eighth market with the largest number of stores for the group. Although firms such as JPMorgan highlighted in a recent report that this is a market with a limited impact on total sales, it seems obvious that its slowdown is among the most obvious factors explaining the slowdown in the growth of the Spanish textile group. In fact, in its half-yearly accounts, presented this week, Inditex acknowledges that the percentage of its sales in Asia and the rest of the world has decreased to 16.6% of the total, compared to 18.4% which they represented a year ago (before the pandemic, they represented up to 24%).

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It seems clear, in any case, that, in general terms, the markets are being able to deal with remarkable fortitude with China’s weakness And, as Marian Fernández points out, there are issues such as the economic situation in the US or the prospects for artificial intelligence that are determining the greater or lesser investment appetite But with China still having a significant influence in many corners of the market, it cannot be ruled out that, if the worst forecasts are confirmed, it will once again occupy a central position in the markets’ narrative.

“Whether Chinese risk can be managed by markets will depend largely on the severity of the economic downturn and the potential escalation of trade warsbut for the moment it represents more of a risk and a burden than a catalyst for the start of a bear market“, says García.