China and the fear of deflation

Rob Brewis shares his recent thoughts on China and the issues he is looking into for his clients, which include deflation, ESG, and China’s property sector.

“Chinese deflation is the worry of the moment, but is this ultimately all bad news? Clearly, when property companies like Country Garden, and the former “Blackrock” of China, Zhongzhi, start to default on their obligations, then this is not good news.

“How bad this is from a Chinese financial system point of view is hard to gauge, but we would still expect State operators to muddle through and find solutions, even if it just kicks the proverbial can further down the road.

“In the tradeable goods sector, the Chinese response to their current excess supply situation is simply to export the excess at clearing prices, which is great for anyone consuming these products, but not for anyone competing with them.

“Consider solar panels, wind turbines, batteries, electric vehicles, petrochemicals, apparel and much more. Log on to AliExpress or Temu for more examples.

For most of us, however, this is good deflation, or disinflation, and is another marker of the end of our so called “cost of living crisis”.

“This is also especially positive for most of the emerging market consumers and the companies in which we invest in other parts of the world.

“Sadly, for China’s property sector, exporting excess supply is not an option, and we do not seem to have found clearing prices yet, despite lower mortgage rates and easing restrictions. There can be no solution for the property sector woes until this happens. But this should not overly distract us from the clear disinflationary winners at the other end of the corporate spectrum in China.

These are the global cost leaders with strong balance sheets and

strong cashflow. Yes, they might be buffeted by broad market fears along the way, but ultimately, they will emerge stronger.”

Rob Brewis, is fund Manager at Aubrey Capital Management