In the Chinese horoscope, the snake stands for wisdom, intuition and elegance, astuteness and strategic thinking. While the sign of the previous year, the dragon, is more interested in quick profits, the snake needs more time and weighs up every possibility. However, it also stands for mistrust and envy. The year of the snake is accompanied by the second year in the element of wood. Wood stands for spring, new beginnings, a time when everything blossoms and flourishes.
Investors are currently very distrustful of the Chinese economy. After the housing bubble burst, most construction companies in China are struggling with borrowers, further falling real estate prices and declining sales. The Chinese government's incentives for new buyers have so far not borne fruit.
The Chinese government's debt is very high, and investors like to denounce it. What they don't mention is that Western governments have also learned to live with increasingly high debt. In 2024, China has cut interest rates to a record low and pumped liquidity into the economy several times to boost it.
Actually, everything would be in place for a new Chinese boom. Only the West does not believe in it. And the Chinese people?
In December 2024, China's trade surplus has climbed to an all-time high. In December, it amounted to 104.84 billion US dollars, with exports rising by 10.7% over the course of the year and imports by only 1%. Gross domestic product growth surprised on the upside in December, coming in at 5.4%, while industrial production rose by 6.2%. This is logical given the trade figures.
For private individuals, only the Chinese domestic market remains. Investments abroad are only possible to a limited extent. Therefore, the only investment options left are the real estate market, the stock and bond markets, and investments in precious metals. At around 43%, the Chinese gross savings rate is one of the highest in the world. So it is only a matter of time and observation, to stick with the snake motif, before confidence in the domestic stock market returns. When interest rates hit an all-time low, bank accounts and pension investments become less attractive, and investors look for alternatives.
The stock market reached its peak here in 2020 and 2021 and has corrected sharply since then. The Hong Kong stock index, the Hang Seng, has been looking increasingly constructive since February 2024, with higher lows and higher highs. The Shanghai Composite has also gained over 30% since its low in September/October and is currently consolidating. The market as a whole is very favourably valued. One example is the stock of Alibaba, the “Amazon” of China. In 2020, the stock price was $315. Today, you can buy it for $85. In the meantime, sales have increased by more than 25% and profits by more than 75% per outstanding share.
According to various sources, the government could devalue the yuan to further stimulate the economy. This would be primarily in response to possible punitive tariffs imposed by the US government. China has already used its currency as a weapon during President Donald Trump's first term in office. Trump is aware of this and may therefore act more cautiously despite his announcements. He will always follow his own rhetoric, which he described in his book “The Art of a Deal”. The book is about setting maximum demands, setting the negotiating range as high as possible to still achieve a negotiating win. Xi Jinping has made it clear that the government is doing everything it can to keep the economy on a growth trajectory. The signs for a new upswing in the Chinese economy are good.
Chinese borrowers need to be selected very carefully. They have had the highest default rates of all emerging markets in recent years. Real estate developers were prominent borrowers in the international bond market. A very large proportion of the loans are now non-performing. The risk of default has also increased in other sectors of the economy. Fundamentally solid names are trading relatively expensively (tight), while corporate governance standards are at a very low level for weaker borrowers. Although the default rate will fall significantly in the coming years, the bond market remains relatively unattractive and too risky.
Indeed, the qualities of the snake are very important in order to process all the information and make the right decisions wisely – whether from an American or a Chinese point of view. The element of wood could also be satisfied if constructive negotiations lead to both sides emerging from a trade war as winners or losers. The past has shown that world trade suffers and that the prosperity of us all is affected. Positive negotiations, on the other hand, could lead to a new “spring” in trade - for both sides. Both economies are too important for us to lose sight of events.
