In August, China revealed consumer price growth that fell short of expectations, indicating persistent weakness in domestic consumer demand. This trend is likely to exert additional pressure on critical sectors within European stock markets, particularly luxury goods and mining stocks, which are acutely responsive to China’s economic indicators.
China’s consumer prices increased by just 0.6% year-over-year in August, below the anticipated 0.7%, although it marked a slight uptick from July’s 0.5% rise. Conversely, factory gate prices, assessed via the Producer Price Index (PPI), remained in a deflationary state, declining by 1.8% compared to the previous year, surpassing the forecasted 1.5% drop and following a 0.8% fall in July.
These figures highlight the ongoing challenges faced by China’s economic recovery, primarily attributed to the downturn in the housing market and the lasting impact of extended Covid-related restrictions. In the second quarter, China’s Gross Domestic Product (GDP) registered a growth of 4.7% at an annualized rate, which was below the projected 5.1% and a decline from the 5.3% growth in the first quarter.
Additionally, last week, China disclosed a weaker-than-expected Manufacturing Purchasing Manager Index (PMI), which has contracted for four straight months. These developments place increasing strain on China’s 5% growth target for 2024, prompting several institutions to downgrade their forecasts. UBS has revised its expectations for China’s economy, forecasting a growth rate of 4.6% this year and 4% in 2025, down from earlier predictions of 4.9% and 4.6%, respectively.
Impact on European Luxury Brands and Mining Stocks
The ongoing sluggish consumer demand in China is exerting significant pressure on key segments of European markets, especially luxury goods and mining shares. Following a broad-based sell-off on Wall Street, European luxury consumer stocks experienced the steepest declines, influenced by analysts’ downgrades amid an uncertain economic forecast for China.
Major European luxury brands like LVMH, Hermès, Christian Dior, and Kering have seen their stocks drop between 7% and 12% over the past week. Notably, LVMH and Kering have endured nearly a third and half of their market valuations evaporating, respectively, over the past six months, as the slowdown in China deeply impacts their revenue streams.
Similarly, European mining shares have suffered from declining prices of base metals and critical minerals, such as copper and iron ore. Companies like Rio Tinto, Anglo-American, and BHP have experienced a 14% decline in share prices over the last three months, primarily driven by the sluggish demand stemming from China’s ongoing property market crisis. The performance of these mining stocks is closely tied to the price movements of their main commodities, particularly copper and iron ore, and the downtrend in prices could persist, intensifying pressure on these stocks.
In early Asian trading on Monday, Singapore Iron Ore futures (SGX TSI Iron Ore 62%) plummeted to just above $90 per metric ton, marking the lowest point since November 2022. Moreover, copper futures on COMEX dipped to a one-month low.
China’s Initiatives to Boost Economic Growth
In response to persistent sluggish household spending, China is ramping up efforts to invigorate its economic growth. In July, the People’s Bank of China (PBOC) unexpectedly cut two key benchmark interest rates by 10 basis points and lowered the seven-day repo rate from 1.8% to 1.7%.
This rate cut followed the Third Plenary Session, an essential event that will mold China’s economic strategy for the coming five years. Reports suggest that China is also contemplating enabling homeowners to refinance home loans totaling up to $5.4 trillion (€4.9 trillion) to stimulate consumer spending.
In May, the PBOC removed the floor on mortgage rates and eased down payment requirements. Additionally, the central bank has provided 300 billion yuan (€38 billion) to support state-owned firms in purchasing excess property inventory from developers. Mike Henry, CEO of BHP, the world’s largest miner, indicated after August’s earnings report, “The government has enacted policies recently that are meant to support the property sector … We expect that we could see a turnaround in the property sector in the year ahead.”
Eyes will now be on forthcoming economic data from China, including updates on new Yuan loans, trade balance, retail sales, industrial production, and fixed asset investment, scheduled for release later this week.
Photo credit & article inspired by: Euronews
