Michael Huber - Associate Investment Analyst, CBIZ Investment Advisory Services

China’s first quarter GDP numbers came out April 15th, which showed it beat expectations despite some Wall Street analysts lowering their expectations leading up to the data release just a day before. Headlines continue to show pessimism toward the Chinese economy even after 1Q24 growth YoY coming in at 5.3% vs. the expected 5.0%. It appears March numbers were a detractor to the quarter’s growth, which shows retail sales down and industrial output falling short. This comes in the face of inflation hitting a mark near 0.2%, falling from the near 2% average that the Chinese economy has experienced over the last 10 years.

In our last blog post, we discussed the demographics of China and as the close attention we should pay to urban populations. The urban jobless rate dropped to 5.2% from 5.3% during the first quarter. The chart below depicts urban jobless claims (Blue) compared to retail sales (Green). This accounted for data surveyed from 31 major cities. Again, this isn’t an earth-shattering move one way or another, but it should be good news to some extent, especially for retail sales going forward… or maybe not. What is interesting is that just in January 2024, China started to publish youth jobless data again after taking six months off from reporting such metrics. This came after the youth jobless numbers hit a record high at the start of last summer.

Data (as of 3/31/2024) sourced via Bloomberg Terminal.

The lack of excitement about the Chinese economy stems from a lack of transparency and distrust of the state-issued data, which is a real issue for outside investors. This cannot be expected to change its course any time soon. In fact, in April, China pledged to help maintain supply chain stability through a deal with Russia. This comes mostly as a boost to the industrial sectors. Another interesting timing factor to this plan is that this announcement comes just after Janet Yellen’s weeks-long stay in China. During her visit, such ties with Russia were highly discouraged by the Secretary of Treasury.

Of course, this is not the first time that China has been accused of such questionable relationships, as they are expected to have imported the widely sanctioned Russian oil after the start of the Ukrainian war. Russia has already benefitted from this increased oil demand from China at a time when sanctions/boycotts were supposed to provide a hit to the sector, which is a large driver of the overall Russian economy. As can be seen below, China has imported increasingly more oil from Russia over the past 20 years or so (depicted by the bright blue line). The huge spike upwards comes right when the sanctions from the US on Russian oil come into play. Overall, oil imports have grown steadily as shown by the orange line. The moral of the story here is that China has been benefitting from these discounts in Russian oil while Russia is able to help fund their war with Ukraine as a result.

Data (as of 3/31/2024) via Bloomberg Terminal.

Reports of Chinese banks aiding Russia in their war with Ukraine have also started to swirl. This is all a contributor to the broader geopolitical landscape as well. It is impossible to escape such a discussion with both traditional and alternative fund managers who have international exposure. It has been clear that there is extreme caution going forward with China because of such noise. What is interesting is that while the US is drafting sanctions to deprive these banks from full access to the global financial system, China is on the move looking to gain more independence when it comes to their monetary situation.

Before Russia invaded Ukraine, a similar situation was seen there. Hopefully, China is not planning on invading Taiwan anytime soon, but that question remains on the minds of many. The blatant disregard for U.S. warnings may be another highlighted point that helps explain the tensions building between the two countries.

While the overall Chinese stock market is at a discount, long-term investors must consider the overall lack of transparency and reporting, especially considering that the market has been on a rally for the past two and a half months. The qualities discussed in this post should warrant a higher premium to provide investors with a better comfort level. I am not sure that we are quite there yet.

Investment advisory services provided through CBIZ Investment Advisory Services, LLC, a registered investment adviser and a wholly owned subsidiary of CBIZ, Inc.