How China’s Growth Slowdown Could Rattle Stocks Around the World

China’s economy grew 6.4% year-over-year in the fourth quarter of 2018, confirming analyst expectations for the slowest expansion in a decade. What happens this year could reverberate through equity markets far away.

What’s Happening

Despite widespread distrust of Chinese economic statistics, few contest that the country’s expansion is slowing, buffeted by trade tensions with the U.S. and a campaign to crack down on a boom in lending at home.

And after years of rapid growth, China’s economic heft is undeniable. On a purchasing-power parity basis, which adjusts for how much the same item costs in different countries, China accounted for 18.3% of world output in 2017, up from 12.2% at the time of the global financial crisis in 2008. It overtook the U.S. in 2013.

In many industries, China is even more important–it accounts for nearly half of all copper demand, for example, and has the world’s biggest car market.

Other data released Monday also signaled a regional slowdown. South Korean exports in the first 20 days of this month declined 14.6% from a year earlier. Exports to China and Japan fell 22.5% and 9%, respectively, but rose 16.9% to the U.S. and 4% to the European Union.

What It Means

Most companies in developed markets don’t make much revenue in China, but the knock-on effects from a slowdown would be meaningful, according to analysts at HSBC. A drop to 6% GDP growth in China from 6.5% would shave more than 3 percentage points of earnings growth from the MSCI All Country World Index this year, the bank estimates, cutting the overall increase in earnings per share to 7.1%.

International investors are also exposed to China through the small but growing presence of mainland shares in influential indexes, and through overseas-listed companies such as Alibaba and Baidu.

Much of what happens next depends on how Beijing responds: whether authorities maintain their deleveraging campaign, or open the spigots for a broad stimulus.

Chinese stocks are now cheap relative to their developed-market peers, based on their projected earnings. But that has caused some disagreement on whether the stocks present good value for investors.

Deutsche Bank analysts expect a 16% rise in the MSCI China index by the end of 2019, with tax cuts raising earnings, and a potential resolution to the tariff tensions that spooked markets in 2018.

Others disagree. Chinese stocks are probably cheap for a reason, according to Jonathan LaBerge, senior investment strategist at BCA Research, and there is a significant chance of a major earnings contraction later this year, based in part on a slowing Chinese economy.
Source: Dow Jones