What China's Slowdown Means for Investors

We speak with Louis Navellier, Chairman and Founder of Navellier & Associates, about what’s led to China’s showdown and the investing opportunities and challenges it presents.

How serious is China's economic slowdown?

Extremely. China’s declining imports and exports cannot be masked. The world is striving to disengage with China since they have proven to be an unreliable trading partner. The exception is electric vehicles (EV) and iron-phosphate (LFP) batteries. China is now invading Europe with cheaper EVs, and the European Union (EU) may impose special tariffs to protect European EV producers. However, BYD Company and CATL (Contemporary Amperex) have a big lead in LFP batteries, so China is expected to dominate EV batteries for the foreseeable future.

President Xi Jinping has removed any potential opposition, so China now has a big leadership void. The recent purge of multiple military leaders creates more uncertainty and hurts the Chinese yuan. It appears to the outside world that President Xi Jinping cannot leave China due to escalating domestic problems.

The youth unemployment problem is the worst since the Tiananmen Square massacre in 1989.  Since China has dispatched tanks to squelch recent protests, the youth may be reluctant to openly protest. Overall, all the uncertainty surrounding China is expected to continue to hinder its exports with Western nations.

What’s led to the slowdown?

China lost its economic mojo as its imports and exports collapsed during Covid-19 and they never recovered. Other Asian countries are also slowing exports due to declining demand in Europe and the U.S. The European countries with strong export economies like Germany and Italy are now in a recession, and higher interest rates around the world have squelched consumer demand.

The U.S. manufacturing sector has been contracting for 10 straight months according to the Institute of Supply Management (ISM). Virtually, all U.S. economic growth is attributable to consumer spending on predominately services. It is imperative that the Fed and other central banks cease cutting key interest rates since the velocity of money (speed of money changing hands) is slowing down dramatically.

What has been the impact to global trade?

The U.S. and Canada are the big winners since they are both food and energy independent.  As a result, their trade deficits are expected to decline due to strong export growth. Countries that are not food and energy independent, like most of Europe and Asia, are expected to suffer unless they can stimulate export growth. The drought in the Panama Canal is now interfering with container ship traffic, so more container ships are being diverted to other ports.

How will China’s slowdown impact investors?

China’s woes are causing deflation for key goods. There is now a glut of EVs, for instance: The price cuts started in China, but quickly spread to Europe and the U.S. I only recommend 2 Chinese American Depositary Receipts (ADR) companies that are internet retailers (i.e., MINISO Group (MNSO) and Vipshop (VIPS)). However, due to a weak yuan, Chinese companies are not attractive to most foreign investors.

What investing opportunities does it present to investors? What investing challenges does it present?

Chinese ADRs in the U.S. have a good reputation when it comes to accounting since they meet U.S. accounting standards. However, the non-ADRs should be avoided due to excessive risk and a lack of transparency.

As soon as China re-engages with the world and becomes a reliable trading partner again, all might be forgiven. However, if President Xi Jinping avoids G-20 meetings, the UN, and disengages with major trading partners, the perception is that he is losing control of his own country. I should add that China’s demographic problems are acute, which is detrimental to its long-term economic growth.

For investors with portfolios that have companies exposed to China, should they adjust their portfolios, and if so, how?

Well, Apple is trying to diversify away from China. Tesla has a great working relationship with China at its Shanghai plant. Ford is very dependent on Contemporary Amperex Technology (CATL) for Lithium iron phosphate (LFP) batteries. So, companies with good working relationships are expected to stick with their Chinese suppliers.

However, if any Chinese suppliers become unreliable, I expect those companies will look for new suppliers and some may actually exit China entirely. Those companies that want to sell goods to Chinese consumers, like Apple, Tesla, VW Group, etc. are not expected to ever leave, since China has over 1 million consumers for their goods.

This interview originally appeared in our TradeTalks newsletter. Sign up here to access exclusive market analysis by a new industry expert each week. We also spotlight must-see TradeTalks videos from the past week.