China's lackluster economic growth following its post-Covid reopening has some investors on edge. eToro USA Investment Analyst Callie Cox and J.P. Morgan Global Wealth Management Investment Strategist Elyse Ausenbaugh join Yahoo Finance Live to discuss how China’s slowing growth may impact the United States.
Cox says, "to see growth not come is as expected for China, to see growth slowing down a little more than expected, could actually prove to be a good thing for the U.S. and for Europe, especially, you know, as the central banks work to cool inflation down." Cox notes that "inflation has been a big concern" throughout the world.
Markets have yet to factor in China’s growth issues, Ausenbaugh says, arguing that "consensus estimates for GDP growth in China are still above 5%. I don’t think that’s reflecting, kind of, the ongoing struggles that they’re having… so it’s definitely a region in which we want to kind of tread carefully."
Video Transcript
- US President Joe Biden last week labeling China's economy a ticking time bomb and investors are focusing on one big company, the country's former largest private developer Country Garden. It hit a record low, the stock did, after reportedly looking to restructure its debt. The bonds have been very active as well. And the issue will evoke memories of China's Evergrande, which defaulted on its debt two years ago. It comes as another Chinese conglomerate in the finance space raised fears after missing payments on several high yield investment products.
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So the big picture there is that corporate concerns are coming amid slowing economic data. We have been trying to sort of get to the bottom of what this means for here in the US, Callie and Elyse. So Elyse, I'll start with you on this. There was a front page story in the Journal today talking about US companies that have exposure in China from Caterpillar to Dow, many of them in the industrial space that you were just talking about. How much of a problem is this slowing growth in China for US companies that rely on it?
ELYSE AUSENBAUGH: Look, we have had a lower than street consensus expectation for China growth the entirety of this year. I don't think that that's necessarily going to change because to us, given where estimates for China growth are right now, that would require a policy support bazooka and we don't think Chinese policymakers are ready to step in to that degree at this time. So kind of roundabout way of saying this has already been penciled in. It's factored into our constructive view on industrials and we think that other dynamics, particularly those domestic ones I was talking about earlier coming from the infrastructure spending, are going to be the bigger directional driver of success for those kinds of companies.
- You guys have factored in. Do you think the market is factored?
ELYSE AUSENBAUGH: No. No. Consensus estimates for GDP growth in China are still above 5%. I don't think that's reflecting kind of the ongoing struggles that they're having. Plus, dynamics that are emerging like the ones this morning with the debt issues certainly aren't going to help investor sentiment. So it's definitely a region in which we want to kind of tread carefully and stay really nimble on our feet.
- What type of longer term ramifications does that have Callie when you think about the fact that China and India, based on the IMF projections? Coming into the start of this year, those were the two economies that we're going to see the most growth and we're lagging where the expectation was for them to come in at. So for the US companies that we were talking about, that that impacts how much kind of longer term of an impact can that also have even beyond 2023 here.
CALLIE COX: Yeah. Well, it depends on how long-term we're talking. Because if you go very long-term, if you go decades down the road, it's all about population. It's all about innovation. And if you look toward the BRICS, they're the ones where population is growing and where a lot of the manufacturing activity is moving to. But if you look over the next year, I'm going to give you an analyst answer, but there are a lot of pros and cons to slowing in emerging markets.
On one hand, we hate to see growth slowing. We need a foundation right now for the global economy after so much change. On the other hand, inflation has been a big concern across the globe really. So to see growth not come in as expected for China, to see growth slowing down a little bit more than expected could actually prove to be a good thing for the US and for Europe, especially as the central banks work to cool inflation down. So I wouldn't paint it as an overly good or bad kind of scenario, but it's one that could trip investors up at this moment, thinking about contagion. But in the long-term it works in the Fed's favor.
- Will we see China do stimulus? And what will that look like? How much will it help?
ELYSE AUSENBAUGH: So we do think that China will continue to kind of trickle out stimulus but we are not expecting them to back up the truck and kind of pursue a wholesale revival of the economy. I think they've been very clear about their emphasis on long-term sustainable growth and I don't think they want to upturn the Apple cart by firing that policy support bazooka that could potentially disrupt that, not just in the near term, but longer term.
- What type of hesitancy have we seen from US companies that are still operating in China or at least trying to, to the best of their ability, make sure that they're still able to have that relationship with customers in China even as, say, in the EV landscape you've got hundreds of competitors and that impacts the pricing mechanisms or on the smartphone landscape.
You could go down the list but there is a larger inclination that we've seen from companies to try and make sure that they are appealing in the face of large competition in China and a propensity of sentiment rather from some of the purchasers in that region to say, you know what, we're going to go with a homegrown company instead.
ELYSE AUSENBAUGH: Sure. I mean, to your point, the demographics suggest that China is not a market that can be ignored long-term. So I do think you'll continue to have companies try to figure out ways that they can engage with those customers. But on the other side of the equation, we have to be very conscious about the potential for ongoing US-China decoupling.
And so I think bigger picture thinking thematically this idea of deglobalization or near-shoring, friend shoring, whatever we want to talk-- or whatever we want to call it, that's not something that's going to go away anytime soon. And we think themes like AI and automation more broadly are going to play a big part in that.
- Do you think what you're talking about limits the impact of a deflation being exported to the US? In other words, reshoring and all of this.
ELYSE AUSENBAUGH: Yeah, maybe longer term but in the near term not necessarily. I don't think it's going to play out quickly enough for that necessarily to be a factor when it comes to today's inflation picture.
- What within the growth struggles for China should we be watching most closely to signal whether there is a turnaround, whether they're even beyond an economy that might need stimulus action, that there is some favorable movement at least in this near term?
CALLIE COX: Yeah, that's a good question. I mean, China's economy is heavily real estate and financials. So I think you, by nature, have to watch those two sectors to get a gauge on what's going on in China. Watch the consumer base data for China, even though it is a little tougher to watch Chinese data and gather trends from it. I think it's really important to watch the consumers, watch how real estate is holding up.
We might have a country-- it sounds like we're having a Country Garden crisis here. And obviously, Evergrande looms large in people's memories. But how many more of those real estate centric crises do we see come to the forefront? I think that's going to be the important part to watch, as well as trade flows coming in and out of China. I mean, you have to remember the global economy is super connected. So watch how much other countries are depending on China. Watch the exports. Watch the imports.