China’s Stock Markets: Awakening the Dozing Dragon

This report is from today’s CNBC Daily Open, our new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.

Blinken unexpectedly meets Xi
U.S. Secretary of State Antony Blinken concluded his visit to China with a surprise meeting with President Xi Jinping. The confirmation of this meeting indicates a potential step in the direction of repairing strained U.S.-China relations. It could also pave the way for a meeting between U.S. President Joe Biden and Xi in November.

Falling in tandem
U.S. markets were closed on Monday to observe Juneteenth, but stock futures saw a slight decline. European stocks also traded lower. A concerning development in the U.K. was that both stocks and bonds dropped simultaneously, with the FTSE 100 losing 0.71% and the yield on the country’s 2-year government bond reaching a 15-year high of 5.077%.

Buffett’s bet on Japanese trading houses
Warren Buffett’s Berkshire Hathaway increased its stake in five Japanese trading houses. The company now holds an average stake of over 8.5% in Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo. Berkshire Hathaway’s confidence in the Japanese market is evident, as these stocks are the most valuable holdings the company has outside the U.S.

U.K. mortgage market turbulence
Two-year fixed mortgage rates in the U.K. surged to 6.01%, the highest level since November 2008. This spike follows a volatile period in the mortgage market, with HSBC even temporarily suspending certain home loan offerings earlier this month.

[PRO] Riding the Asian wave
The MSCI Asia Pacific equities index has experienced a surge of over 25% since its low in October last year, driven by investor enthusiasm in the region. Morgan Stanley has identified five Asian stocks as its top picks, predicting that all of them could see a minimum 50% increase in value over the next 12 months, with one potentially even offering a 67% upside.

While U.S. markets were closed on Monday, it’s worth taking a closer look at the world’s second-largest economy, China. Unfortunately, the current state of China’s economy is far from ideal.

In January, when China abruptly abandoned its “zero-Covid” policy, analysts had mixed feelings of worry and excitement. There were concerns that a sudden revival of China’s massive economic engine could further exacerbate inflation. Many anticipated higher commodity and oil prices as a result. On the other hand, some saw China as a potential catalyst for a global economy that had lost its way. Quoting Standard Chartered Chairman José Viñals, “The Chinese economy is going to be on fire and that’s going to be very, very important for the rest of the world.”

Now, at the midpoint of the year, let’s assess how China is performing against these expectations. To put it simply, it appears that everyone has been mistaken about China. Rather than fueling inflation, China is currently grappling with potential deflationary pressures domestically. The country’s consumer price index only rose by 0.2% year over year, while its producer price index plummeted by 4.6%. Recent economic data has been disappointing, causing Wall Street banks to revise their growth projections for China, although these revised projections still remain higher than China’s own target of around 5%. Additionally, oil prices have been declining despite Saudi Arabia’s surprising production cuts, and iron ore prices are not faring well due to a projected fall in China’s demand for steel.

In summary, China’s economy is currently facing significant challenges. While there is a possibility of a turnaround with the central bank cutting rates and the expectation of fiscal stimulus, for now, China’s economic growth is sluggish, and the outlook feels rather gloomy.