China! Just the word stirs strong American emotions. For years many have seen its giant manufacturing engine as a threat to U.S. jobs, plus the Chinese Communist Party’s new five-year plan to turbocharge its Tech sector further fuels those fears. Others see China’s rise as threatening a new cold war, with its Hong Kong crackdown signaling more aggressive tactics. Telling you how to think about these and many other Chinese sociopolitical issues is beyond me. But for investors, it is critical to understand that stocks don’t view China—or any country—through a sociopolitical lens. Follow their lead and you’ll see how China adds fuel to the global bull market—and proves normalcy can return post-pandemic.
Despite views of China as a threat to Western economies, 2020 shows once again how valuable the Asian powerhouse is to global growth. Consider: Despite COVID-related weakness in Europe and parts of Asia, crude steel production has eclipsed 2019 levels. Why? China absorbed all the missing iron ore demand. One iron-focused multinational miner reported China accounted for almost 70% of its third quarter sales, up from less than 50% in 2019. It isn’t just steel. Overall, China’s imports rose 13% year-over-year in September. Chemical imports for making fertilizer rose 16%. Meat and meat products? Up 54% from a year ago. Pharmaceutical imports were up 7%, while clothing and accessories were 9% higher. Chinese demand for global goods grew dramatically. And that is good for everyone.
China is also busy supplying the world with goods needed this year. Its exports grew nearly 10% y/y in September, boosted by big jumps in everything from industrial and office machinery to electronics to fabrics. Remember all those fears about Trump’s tariffs tanking China trade? Bunk! September’s overall industrial production rose 7 y/y, despite the winter’s record plunge. Europe and America are recovering, too, but because China locked down—and lifted restrictions—sooner, it is ahead of the curve. In the U.S., industrial production was down -8% y/y. The latest eurozone data, from August, showed production down -7% y/y.
But trade data aren’t all that’s bullish about China’s recovery. As COVID’s initial epicenter, China has been a leading indicator for the West throughout this crisis. It’s now showing many signs of normalcy returning post-pandemic—while Western pundits bloviate on how COVID’s changes will skew economic life forever. Early on, many said its recovery was all about stimulus, creating a two-speed economy in which heavy industry soared while consumption lagged. Yet retail sales—down over -20% y/y in January-February—are back above year-ago levels. That helped third quarter GDP growth accelerate to 5% y/y—despite COVID having turned 2020 upside down. And, of course, the topper is it’s stock market which is leading the world markedly leaving the S&P 500 in the dust, up over 24% year-to-date and 35% year-over-year.
Domestic travel, meanwhile, has zoomed since February. Hotel occupancy and airline passengers are at roughly 90% of 2019 levels as of August. During early October’s eight-day “National Day” holiday, more than 630 million Chinese traveled domestically, spending some $70 billion on tourism. That’s still roughly -30% below 2019 levels but a big improvement over May’s five-day Labor Day holiday, when domestic tourism revenue was down -60% y/y. In its third quarter earnings report, U.S. cosmetics firm Estée Lauder said sales in Chinese travel stores surged double digits. Elsewhere globally they were flat. Overall, the firm said, sales growth in Chinese brick-and-mortar stores hit double digits for the first time since COVID. Even in Wuhan, life is normalizing. Anecdotal reports indicate it’s tough getting a table at some of the city’s high-end restaurants.
To be clear: I’m not endorsing China’s coronavirus response. I’m skeptical we even have great information about that response. After all, researchers have repeatedly shown that the country’s official case counts radically understate reality. How much is impossible to know. But there is next to no chance that, after 13 residents of Qingdao tested positive in mid-October, a mandatory test of the city’s nearly 11 million residents in mere days turned up zero additional cases.
But that only makes China’s rebound more bullish and to some extent astounding and instructive for the rest of the world. It shows that COVID headwinds or not, economic increases can—and will—return to the U.S., Europe and beyond, just as it has in China. Forward-looking markets understand that. They have been pre-pricing that since March’s low. Make sure you do, too, or you’ll miss out on this new bull market’s continued rise.
