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GDP was Fine, Just Not Spectacular

China’s 4Q 2023 gross domestic product (GDP) came out at 5.2%, which translated to a full-year 2023 growth of 5.2%. This pretty much was in line with the government’s target of ‘around 5.0%’. This was higher than the 3.0% recorded in 2022 when several lockdown restrictions crippled the Chinese economy.

The government has not officially declared a government target yet. But the International Monetary Fund expects 2024 to be a weaker year with a projected growth of 4.6%. World Bank also thinks so with a projection of 4.5%.

For you as an investor, you should take this as a sign of weakness in the Chinese economy.

But Deflation is a Concern Now

No joke. But China has experienced deflation for the past 5 months now. Its latest reading of -0.8% is certainly concerning and has sparked off talks of a Japan-like Lost Decade. If you don’t understand the reference here, Japan underwent a long period of slow economic growth and deflation from 1993 onwards until the late 2010s.

Investors are worried that this might be the start of something similar also with Chinese consumer sentiments being weak. Meanwhile, the property market is also in a deep downturn. Both these trends did happen in Japan.

With Government Support Not Enough

I have previously written about this before. Chinese government support whether fiscal or monetary is just not enough. It’s too slow and conservative in cutting interest rates. And it’s spending all of its money on the wrong things in building infrastructure and properties that Chinese people don’t need in the short term.

It should just aggressively expand its cash transfers to encourage Chinese consumers to spend. That’s what the Chinese economy sorely needs now.

While Long-Term Reforms Are Lacking

I do not doubt the capacity of the Chinese government and bureaucracy to implement reforms. But they are just the wrong ones. The recent experiences of clamping down on the tuition, technology and gaming industries were just misguided and paint a deep picture of distrust of its companies.

President Xi Jinping’s ‘guidance’ and ‘philosophy’ severely lack details on how regulation should be done. And that has decreased investors, consumers and companies’ confidence in the Chinese economy.

While EV and AI-Related Stocks Seem to Have Done Well

Company in Focus (February Performance)	Analysts’ Investment Thesis	What We Think You Need to Know
Li Auto (+66%) Designs, produces and sells electric vehicles.Analysts’ Target Price: US$55.5 (+21%)	Tim Hsiao (Morgan Stanley) Confident in the new model, MEGA, in driving sales and has the highest profit margins.Li Auto’s shift to expanding the 4S store network could drive higher traffic and efficiency.Consolidation in the EV premium market is positive for Li Auto.	Consistently exceeds analyst expectations in earnings. Beat expectations by 60% for 4Q 2023.PER at 28 times. Fair valuation considering that the EV trend is riding high currently.Have weathered the price war in China pretty well and is profitable now.
Xpeng (+13%) Designs, produces and sells electric vehicles.Analysts’ Target Price: US$14.19 (+51%)	Edison Yu (Deutsche Bank) Strong track record in delivering EVs to customers.Target of 250,000 EVs in 2024 compared to 147,000 in 2023.Expectations of higher profit margins due to lower battery cost.	Share price has declined by 30% since the beginning of 2024. Valuations are expensive, with a price-to-book ratio of 2.3 times compared to the industry’s average of 1.4 times.Xpeng is still unprofitable, making in 2023.
SMIC (+19%) Designs, produces and sells electrical and electronic semiconductors and chips.Analysts’ Target Price: US$17.82 (+4.5%)	IJIWEI (Barclays) Chip manufacturing capacity to double within the next 5 years.Focus on legacy chips is positive considering its wide applications in many products.	AI trend will drive market demand for the next 5 years.However, there is currently an oversupply of such products, depressing prices.
Meituan (+29%) Technology company providing food delivery, retail, hotel and travel services.Analysts’ Target Price: US$88.40 (+10.8%)	Ronald Keung (Goldman Sachs) Oversold position by investors.Food delivery business volume has grown threefold over the past five years.Profitability has surged by 20 times.	The pace of economic activity in China remains precarious in 2024.Much remains to be seen whether the overall economic activity can support Meituan’s business.