China is at a crucial juncture where its once-thriving real estate sector is facing a downturn, triggering broader economic concerns. The burden of debt-laden developers and a steep decline in housing prices slowed economic growth to 4.9% in the third quarter of 2023, per the country’s National Bureau of Statistics (NBS). Apart from real estate woes, global economic slowdown and domestic consumption challenges are a formidable test for China's resilience.
In the wake of a once-thriving real estate sector that propelled China's economic expansion, the nation finds itself in a state of crisis as stagnation looms. The burden of highly leveraged developers and a plunge in housing prices cast a shadow over the economy, reflected in slower-than-anticipated economic growth in the third quarter of 2023. The repercussions extend beyond the real estate sector, impacting financial institutions and the construction industry. While specific policy interventions provide temporary relief, there is an urgent call for sustained restructuring and deleveraging to dispel the downturns denting the economy and prevent systemic financial risks.
The real estate sector, contributing as much as around 30% to the country's GDP, grapples with a debt crisis rooted in a decade of rapid growth fueled by extensive borrowing. The imminent collapse of the troubled Evergrande Group underscores the urgency for comprehensive debt management strategies. Government regulations, though essential for long-term stability, have contributed to sector stagnation by curbing excessive leverage and speculation. The broader economic slowdown, exacerbated by the pandemic and trade tensions, compounds these challenges, creating a perfect tempest with far-reaching repercussions.
Despite China's economic rebound from pandemic lows in 2023, two persistent factors threaten consistent growth — the global economic slowdown and the domestic consumption conundrum. These challenges, intertwined and complex, are major hurdles for China's economic resilience.
As major economies, including the United States, grapple with inflation and rising interest rates, the impact swiftly reaches China. Weakening global demand and trade tensions, particularly with the United States, cast a shadow on the country’s export-oriented industries, slowing growth in manufacturing and foreign investment. The headwind adds to internal pressures from a struggling real estate market and high debt levels.
In response to external headwinds, policymakers are attempting to shift toward domestic consumption. The goal is to decouple China's economic fortunes from volatile global forces by nurturing a robust internal market. However, challenges persist. The high savings rate among Chinese households, influenced by cultural factors and concerns about healthcare and education costs, is a significant barrier. The absence of robust social safety nets hinders the conversion of disposable income into increased consumption. Stark income inequality, despite rising average incomes, limits the purchasing power of a substantial portion of the population, impeding significant growth in consumption.
The maturing middle class is undergoing a shift in spending habits, favoring experiences and services over traditional material goods. This presents opportunities for businesses but necessitates adaptation to evolving consumer preferences. Addressing these challenges is crucial for China to successfully navigate its consumption conundrum and forge a path toward a more sustainable economic future.
Forecasting the trajectory of China's economic powerhouse resembles peering into a crystal ball adorned with dragon scales — brimming with potential yet shrouded in uncertainty. While apprehensions related to 2024 cast prolonged shadows, the Chinese economy continues showcasing optimism.
The gradual relaxation of the stringent zero-COVID policy is an important transition. This approach effectively curbed the pandemic and constricted consumer confidence and expenditures. The cautiousness toward a more open society offers some revitalization, potentially infusing vitality into businesses and rejuvenating the economic pulse.
Beyond this policy shift, the government wields a reliable arsenal of supportive measures. Infrastructure initiatives, tax reductions and other stimuli stand ready as economic shock absorbers, offsetting challenges ahead. Global trade dynamics perform a delicate dance. If the world economy avoids a recessionary stumble, China's export-oriented prowess might witness a trade resurgence.
China isn't merely reliant on external cues. Its internal strength resonates with untapped potential. The expansive and resilient domestic market serves as a cushion, mitigating the impact of external headwinds. Investments in technological advancements promise to unlock novel avenues for growth, birthing new sectors. The ascending middle class is steadily attaining increased spending power, providing the fuel for sustained economic expansion.
However, the narrative remains incomplete without acknowledging lurking challenges. The property market, once a robust force, is navigating a downturn and threatening financial stability and overall economic well-being. Geopolitical tensions, exemplified by trade skirmishes with the United States, loom as potential disruptors of supply chains and investment flows, causing friction in the economic machinery. The perpetual burden of debt raises concerns about the government's ability to navigate unforeseen turbulence.
China faced economic challenges with a declining real estate sector, marked by the Evergrande crisis. External factors like the global economic slowdown and trade tensions amplify these issues, prompting policymakers to shift focus to domestic consumption. While internal strengths and investments in technology offer potential, challenges such as a high savings rate, income inequality and a maturing middle class must be addressed for sustained economic growth. As such, Chinese stocks that failed to stand out in 2023 have a chance to bounce back in 2024.
However, finding stocks that are likely to rebound in 2024 is no easy feat.
Here, Zacks’ proprietary methodology comes in handy. Our research shows that stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer good investment opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.
Here we pick five Chinese stocks that have lost more than 10% so far in 2023 but have the potential to turn around next year based on their strong fundamentals.
H World Group Limited HTHT: Shanghai-based H World Group is a global hotel giant sporting a Zacks Rank #1. It operates under various brands like Hi Inn, Elan Hotel and Steigenberger Hotels & Resorts, catering to different budget and luxury segments. The company’s business model is diverse, involving leased and owned hotels, management contracts and franchises.
H World Group has an expected earnings growth of 10.2% for the following year. Over the last 60 days, the Zacks Consensus Estimate for 2024 has increased 7.3%. HTHT’s earnings beat the Zacks Consensus Estimate in each of the last four quarters at an average of 94.5%. The stock has lost 19% year to date.
DouYu International Holdings Limited DOYU: DouYu International, a leading game-centric live streaming platform in China and a pioneer in the eSports value chain,carries Zacks Rank #2. The company is actively enhancing its approaches to monetization and marketing while exploring fresh business models and monetization avenues. This effort is aimed at establishing a robust groundwork for business expansion and dedicatedly generating value for shareholders.
The Zacks Consensus Estimate for DouYu International’s earnings for 2024 has increased 100% in the past 60 days. Its earnings beat the Zacks Consensus Estimate in all of the last four quarters. DOYU has a trailing four-quarter earnings surprise of nearly 150%, on average. The stock has tumbled 46.8% year to date.
Kanzhun Limited BZ: Kanzhun is a leading online recruitment platform in China, connecting job seekers and employers seamlesslyand currently sports a Zacks Rank #1. The company is expecting revenue growth due to AI innovations and data analytics.
Kanzhun has expected year-over-year earnings growth of 15.6% for 2024. In the past 60 days, the Zacks Consensus Estimate for 2024 has increased 17.5%. BZ’s shares have lost 22.1% year to date.
JinkoSolar Holding Co., Ltd. JKS:JinkoSolar is a leading global manufacturer of solar modules and developer of clean energy solutions. The company is headquartered in Shanghai and currently sports a Zacks Rank #1. JinkoSolar's commitment to R&D is expected to translate into further advancements in module efficiency and cost reduction, maintaining its competitive edge and potentially opening up new market segments.
JinkoSolar has an expected earnings growth of 8.5% for 2024. In the past 60 days, the Zacks Consensus Estimate for 2024 earnings has increased 12%. The bottom line beat the Zacks Consensus Estimate in all of the last four quarters. JKS has a trailing four-quarter earnings surprise of nearly 102.7%, on average. The stock is down 13.9% year to date.
OneConnect Financial Technology Co., Ltd. OCFT: OneConnect Financial Technology is a leading technology-as-a-service provider dedicated to supporting financial institutions in their digital transformation journeys. It currently carries a Zacks Rank #2. The increasing adoption of cloud computing in the financial sector plays into OCFT's strengths, as its platform is cloud-native and designed for scalability and flexibility.
OCFT has an expected earnings growth of 29% for 2024. In the past 60 days, the Zacks Consensus Estimate for 2024 earnings has increased 23.3%. The stock has lost 46.1% year to date.
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