Don’t Count on China to Save the World Economy
Early signs suggest the country’s economic revival will mostly be felt in service industries at home
6 min
The world is counting on an economic bounceback from China to power global growth and help keep recession at bay. Don’t bank on it.
China’s recovery after years of Covid-19 lockdowns will likely look a lot different from previous ones. And for many parts of the world, economists warn, it could be less potent than governments and businesses hope.
China has historically relied on government stimulus and heavy investment to power itself out of slumps. That mix helped yank the global economy out of the doldrums after the 2008 financial crisis.
This time, China is deeply in debt, its housing market is in distress, and much of the infrastructure the country needs is already built. As a result, its latest revival will be led by consumers, who are casting off almost three years of public-health restrictions and travel bans after the government abruptly dismantled its zero-tolerance policy toward Covid-19.
Data shows that people are again venturing out and shopping in big cities, and there are signs that the worst of China’s Covid outbreak might be behind it. Like their American counterparts, Chinese consumers squirrelled away cash during lockdowns. But consumer confidence remains low. While wealthier Chinese are opening their wallets, many others are choosing to save more than spend.
Early indications suggest the biggest effects of China’s rebound will be felt at home, rather than abroad. Official data, including business surveys, sales and public transit numbers, suggest the strongest growth will come from service industries such as restaurants, bars and travel.
That means that while an accelerating China is good news for fragile global growth, especially as the U.S. and Europe are set to slow, the direct effects of its revival will likely be less pronounced elsewhere than in the stimulus-led expansions of the past.
“China will deliver a powerful economic recovery, but the growth spillover to the rest of the world will be much more muted in this cycle because of the nature of the economic rebound,” said Frederic Neumann, chief Asia economist at HSBC.
The U.S. economy is unlikely to feel much benefit at all, some analysts say, since it has limited exposure to China’s service industries. U.S. growth might even be squeezed if China’s reopening pushes up demand for energy and raises global energy prices, adding to inflationary pressures.
China’s economy is set to expand 5.2% in 2023, according to the International Monetary Fund’s latest forecasts, easily outpacing the 1.4% growth rate expected in the U.S. and 0.7% in Europe’s 20-nation common currency area.
The IMF predicts China will account for around a third of global growth this year, compared with just 10% for the U.S. and Europe combined. That would take China back to the kind of share it had in the five years before the pandemic, IMF data show. In 2022, when the U.S. grew at 2.1%, China’s economy expanded 3%, its second-worst performance since the death of Mao Zedong in 1976. China’s share of global growth sank to 16%.
“It’s so important that China rebounds this year because the U.S. and Europe are expected to slow down sharply,” said Hoe Ee Khor, chief economist at the Asean+3 Macroeconomic Research Office, an economic research organisation that provides policy advice and technical assistance to economies in East and Southeast Asia. “It provides the support that’s missing among those three pillars.”
Wealthier Chinese could help boost the global economy with spending on European luxury goods and vacations in places such as Southeast Asia. Swiss watchmaker Swatch Group AG said in January that based on the rebound in sales it experienced in China immediately after reopening, it expects a record year for revenue, powered by sales in China, Hong Kong and Macau as travel resumes.
Bernard Arnault, chairman and chief executive of luxury goods giant LVMH Moët Hennessy Louis Vuitton SE, told analysts and reporters on Jan. 26 that stores are full in Macau. “The change is quite spectacular,” he said.
“This is a serious bump for everybody,” David Calhoun, chief executive officer of Boeing Inc., said last month on a call with investors, describing China’s reopening as “a major event in aviation.” He said the company is aiming to get idled aircraft back in the air and is hopeful on further deliveries to China, as Chinese carriers will need Boeing’s 737 MAX aircraft to meet rebounding demand for flights.
Other companies are more circumspect. Chinese households received far less in fiscal support from their government during the pandemic than workers in advanced economies, and many consumers remain worried about a weak job market and the continuing real-estate slump.
Colgate-Palmolive Co. Chief Executive Officer Noel Wallace told analysts late last month that despite the euphoria about reopening, sales of the company’s household goods in China remain soft. “China is a big question mark,” he said.
Yum China Holdings Inc., which manages restaurant chains including Kentucky Fried Chicken and Pizza Hut in China, said it saw a bump in sales during China’s recent Lunar New Year holidays but it is wary about the outlook. “While all these happy improvements are happening, we are also cautious that the value for money, the cautious spending is also happening,” Chief Executive Joey Wat said on a Feb. 7 call with analysts.
In previous years of stimulus-fuelled growth, when China plowed money into real estate, infrastructure and factories to turn its economy around, its ravenous demand for commodities and machinery was felt all over the world—among tool makers in Germany, copper producers in Latin America, makers of excavators in Japan and coal producers in Australia.
In 2009, China expanded 9.4% thanks to a $586 billion stimulus package, providing a powerful counterweight to advanced economies hit hard by the global financial crisis.
Economists at Goldman Sachs estimate China’s reopening will add 1 percentage point to global economic growth this year, primarily through higher demand for energy, higher imports and international travel. The biggest beneficiaries are likely to be oil exporters and China’s neighbours in Asia, they said.
Modelling by Oxford Economics implies a smaller boost to global growth. The consulting firm said if Chinese gross domestic product grows 5% this year with the end of Covid restrictions, that would lift global growth to just 1.5%, a gain of 0.2 percentage point compared with their previous forecast.
Goldman Sachs estimates the direct effect of China’s reopening on U.S. growth to be slightly negative, perhaps shaving about 0.04 percentage point off 2023 growth, as the effect of higher oil prices offsets any increase in exports or tourists. The U.S. and other economies less exposed to the reopening might still benefit from indirect effects, though, if China’s revival lifts global trade and business activity overall or contributes to easier financing for households and businesses.
Even if its growth rebounds sharply, underlying issues remain in China’s economy. Local governments are saddled with debt, limiting their ability to finance infrastructure spending. China has taken steps to boost the real-estate industry, such as easing lending curbs on overstretched developers, but such policies aren’t expected to reverse China’s drop in home sales soon because falling prices mean families are still cautious about home purchases, said Tommy Wu, chief China economist at Commerzbank AG. That will limit China’s appetite for commodities such as iron ore, he said.
Other policy goals could weigh on Chinese demand for imports. Beijing is eager to produce more sophisticated capital goods domestically, rather than buy them from Japan and Germany, and has been reining in polluting industries such as steel to meet climate goals.
Steel production fell 2.1% in 2022 from the previous year, and iron ore imports dropped by 1.5%. BHP Group Ltd., the world’s largest miner by market value, said in January that it expects China to be a stabilizing force for commodity demand in 2023. But it isn’t predicting a rebound to pre-pandemic rates of growth, saying Chinese steel output will likely plateau this half-decade after what was possibly the peak in production in 2020.
While domestic flights in China have picked up quickly, it will take some time before flights to Europe and the U.S. begin to approach pre-pandemic levels, said Olivier Ponti, vice president insights at ForwardKeys, a consulting firm that tracks travel industry data.
In January, the number of flights to destinations outside mainland China was about 15% of where they were in 2019. The most popular destinations are relatively nearby, including Macau, Hong Kong, Tokyo and Seoul.
For now, Chinese travellers to Thailand, a popular destination, are mostly businesspeople or affluent independent tourists. Thai officials say they expect a slow uptick of visitors as more flight routes open and group tours resume from Feb. 6, but that it could take years for arrivals to return to the levels they were before Covid struck.
China’s contribution to the global economy will ultimately depend on the durability of Chinese consumption. For now, even though Chinese households accumulated $2.6 trillion in fresh savings last year, less than 30% of the money is available to spend straight away. The rest is socked away in long-term savings accounts. The job market is still weak and the real-estate slump is sapping household wealth.
The consumption recovery will be “shallow and short-lived,” according to Logan Wright, director of China markets research at Rhodium Group, a research firm based in New York. He predicts that after a quick surge in growth around the second quarter, the recovery in consumer spending will quickly lose steam.
—Nick Kostov, Eric Sylvers, Feliz Solomon, Rhiannon Hoyle and Jeffrey Sparshott contributed to this article.
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Shares in European banks such as UniCredit have been on a tear
4 min
After years in the doldrums, European banks have cleaned up their balance sheets, cut costs and started earning more on loans.
The result: Stock prices have surged and lenders are preparing to hand back some $130 billion to shareholders this year. Even dealmaking within the sector, long a taboo topic, is back, with BBVA of Spain resurrecting an approach for smaller rival Sabadell .
The resurgence is enriching a small group of hedge funds and others who started building contrarian bets on European lenders when they were out of favour. Beneficiaries include hedge-fund firms such as Basswood Capital Management and so-called value investors such as Pzena Investment Management and Smead Capital Management.
It is also bringing in new investors, enticed by still-depressed share prices and promising payouts.
“There’s still a lot of juice left to squeeze,” said Bennett Lindenbaum, co-founder of Basswood, a hedge-fund firm based in New York that focuses on the financial sector.
Basswood began accumulating positions around 2018. European banks were plagued by issues including political turmoil in Italy and money-laundering scandals . Meanwhile, negative interest rates had hammered profits.
Still, Basswood’s team figured valuations were cheap, lenders had shored up capital and interest rates wouldn’t stay negative forever. The firm set up a European office and scooped up stock in banks such as Deutsche Bank , UniCredit and BNP Paribas .
Fast forward to 2024, and European banking stocks are largely beating big U.S. banks this year. Shares in many, such as Germany’s largest lender Deutsche Bank , have hit multiyear highs .
A long-only version of Basswood’s European banks and financials strategy—which doesn’t bet on stocks falling—has returned approximately 18% on an annualised basis since it was launched in 2021, before fees and expenses, Lindenbaum said.
The industry’s turnaround reflects years spent cutting costs and jettisoning bad loans, plus tougher operating rules that lifted capital levels. That meant banks were primed to profit when benchmark interest rates turned positive in 2022.
On a key measure of profitability, return on equity, the continent’s 20 largest banks overtook U.S. counterparts last year for the first time in more than a decade, Deutsche Bank analysts say.
Reflecting their improved health, European banks could spend almost as much as 120 billion euros, or nearly $130 billion, on dividends and share buybacks this year, according to Bank of America analysts.
If bank mergers pick up, that could mean takeover offers at big premiums for investors in smaller lenders. European banks were so weak for so long, dealmaking stalled. Acquisitive larger banks like BBVA could reap the rewards of greater scale and cost efficiencies, assuming they don’t overpay.
“European banks, in general, are cheaper, better capitalised, more profitable and more shareholder friendly than they have been in many years. It’s not surprising there’s a lot of new investor interest in identifying the winners in the sector,” said Gustav Moss, a partner at the activist investor Cevian Capital, which has backed institutions including UBS .
As central banks move to cut interest rates, bumper profits could recede, but policy rates aren’t likely to return to the negative levels banks endured for almost a decade. Stock prices remain modest too, with most far below the book value of their assets.
Among the biggest winners are investors in UniCredit . Shares in the Italian lender have more than quadrupled since Andrea Orcel became chief executive in 2021, reaching their highest levels in more than a decade.
Under the former UBS banker, UniCredit has boosted earnings and started handing large sums back to shareholders , after convincing the European Central Bank the business was strong enough to make large payouts.
Orcel said European banks are increasingly attracting investors like hedge funds with a long-term view, and with more varied portfolios, like pension funds.
He said that investor-relations staff initially advised him that visiting U.S. investors was important to build relationships—but wasn’t likely to bear fruit, given how they viewed European banks. “Now Americans ask you for meetings,” Orcel said.
UniCredit is the second-largest position in Phoenix-based Smead Capital’s $126 million international value fund. It started investing in August 2022, when UniCredit shares traded around €10. They now trade at about €35.
Cole Smead , the firm’s chief executive, said the stock has further to run, partly because UniCredit can now consider buying rivals on the cheap.
Sentiment has shifted so much that for some investors, who figure the biggest profits are to be made betting against the consensus, it might even be time to pull back. A recent Bank of America survey found regional investors had warmed to European banks, with 52% of respondents judging the sector attractive.
And while bets on banks are now paying off, trying to bottom-fish in European banking stocks has burned plenty of investors over the past decade. Investments have tied up money that could have made far greater returns elsewhere.
Deutsche Bank, for instance, underwent years of scandals and big losses before stabilising under Chief Executive Christian Sewing . Rewarding shareholders, he said, is now the bank’s priority.
U.S. private-equity firm Cerberus Capital Management built stakes in Deutsche Bank and domestic rival Commerzbank in 2017, only to sell a chunk when shares were down in 2022. The investor struggled to make changes at Commerzbank.
A Cerberus spokesman said it remains “bullish and committed to the sector,” with bank investments in Poland and France. It retains shares in both Deutsche and Commerzbank, and is an investor in another German lender, the unlisted Hamburg Commercial Bank.
Similarly, Capital Group also invested in both Deutsche Bank and Commerzbank, only to sell roughly 5% stakes in both banks in 2022—at far below where they now trade. Last month, Capital Group disclosed buying shares again in Deutsche Bank, lifting its holding above 3%. A spokeswoman declined to comment.
U.S.-based Pzena, which manages some $64 billion in assets, has backed banks such as UBS and U.K.-listed HSBC , NatWest and Barclays .
Pzena reckoned balance sheets, capital positions and profitability would all eventually improve, either through higher interest rates or as business models shifted. Still, some changes took longer than expected. “I don’t think anyone would have thought the ECB would keep rates negative for eight or nine years,” said portfolio manager Miklos Vasarhelyi.
Some Pzena investments date as far back as 2009 and 2010, Vasarhelyi said. “We’ve been waiting for this to turn for a long time.”
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