China's economic slump casts a shadow over ASX

The economic news from China is getting worse. From deflation to falling exports, high unemployment, and a debt-laden property sector, the global economic powerhouse is facing significant challenges. Clearly, these growing economic challenges are bad news for the many ASX-listed stocks exposed to China.

Caught in the crosshairs

After the Evergrande property crisis, another big property developer, Country Garden, is in trouble and at risk of default risk in the coming weeks. The associated contagion seems to be spreading with the $2.9 trillion Chinese trust industry the next victim, thanks to significant investments in real estate.

China is grappling with more than just real estate troubles.

The country’s lack of big-bang stimulus measures has led to a mass exodus of global investors, resulting in foreign investors selling a record $12 billion worth of Chinese stocks in August alone.

At the same time, issues like rising youth unemployment and shrinking consumer confidence are causing broader economic concerns for the nation and its trading partners.

Its economic growth isn't looking too rosy either. In the June quarter, the Chinese economy only grew by 0.8 per cent, leading economists to predict it may not hit its 5 per cent growth target for the full year. That's a significant drop from the 8 to 10 per cent growth rates we saw during the boom era.

This isn't just China's problem. It also spells trouble for its main trade partners like Australia, Japan, South Korea, and Southeast Asian countries—unsurprisingly, imports from these nations all recorded double-digit declines in July.

More than that, a major economic downturn in China casts a shadow over the entire global economy. It not only implies lower demand for iron ore, oil, and other commodities, but will also have significant implications for ASX companies in other sectors as well—for example, agriculture and tourism.

China's woes keep ASX miners on a rollercoaster

Australian miners are facing further headwinds from the slowdown in China.

You see, about 60 per cent of steel demand comes from the Chinese property and infrastructure sectors which are struggling with a medley of challenges—home prices are plummeting, developers are defaulting on their obligations, and people are becoming increasingly frustrated.

On top of that, there are production restrictions on steelmakers. As a result, Citi predicts that iron ore might drop back to $US100 per tonne as supply outstrips demand in the second half of the year.

All of this is weighing on mining stocks, especially BHP, Rio Tinto, and Fortescue Metals Group.

But, remember they'll also be the first to benefit if China manages to ramp up infrastructure spending in the near future.

Lithium is no exception

Lithium, Australia's second-largest export to China, has not been spared either.

It's primarily used in electric vehicle (EV) batteries, and with EV sales declining in the country, Chinese lithium prices have been hit hard, plummeting by over 50 per cent since January.

China consumes nearly all of Australia's lithium output, so for investors interested in this hot commodity, it's crucial to be prepared for potential headwinds from China.

Beyond commodities

The stalled recovery of our top trading partner doesn't impact only the resources sector but also agriculture, tourism, and education. In fact, China is the largest consumer of Australian tourism and education services, and wealthy Chinese tourists make up a big chunk of our retail and casino business.

Unfortunately, China's high-spending tourists have been slow to return. Post-pandemic numbers are still down by about 50 per cent compared to pre-pandemic levels.

However, for investors hunting for value, the Chinese's strong preference for Australian dairy and food like wine, beef and seafood could prove supportive of those sectors.

So while there are still some trade barriers in place for certain products, investors should keep an eye on stocks like Bubs Australia, A2 Milk, GrainCorp, and Treasury Wine Estates, which have shown resilience despite Chinese recession concerns.

All eyes on China's stimulus

As we started the year, hopes were high that China's economy would boost a global economy battered by high inflation. But that didn’t happen, and the once-dominant narrative of China's reopening has now faded into the background.

The downturn in China poses a sizeable challenge for the Australian economy, which is already reeling from 12 consecutive cash rate hikes by the RBA to curb inflation. Concerns about China's economic weakness are impacting market sentiment, and looking ahead, it will be a key theme influencing the ASX’s performance.

Investors should closely follow the details of any Chinese stimulus measures announced in the coming months as this thematic not only directly affects the fortunes of blue-chip miners, but also the Australian economy.

Disclaimer: This article is prepared by Ankita Rai. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.