Will 2024 in China be much the same as 2023?

Maybe it is because I am ‘advancing in experience’ but, just as they say, life gets quicker as you get older. As an analyst, company results also seem to be coming through at an accelerated pace. There have already been a number of company announcements in the first few weeks of January and looking at the results calendar, there are some major company results coming up very quickly too: Microsoft will report post-market close on January 30th and Meta (Facebook) for example reports on February 1st. The days are gone when one had at least six weeks as an analyst at the start of the year to prepare yourself for the onslaught.

‌While it is early days, one of the themes that is coming through (as was the case with several of the pre-Christmas updates from companies) is that China is not the engine room for growth for many companies that it was before—a fact that is being increasingly noticed by investors. It's also a major reason why luxury goods companies have fallen out of favour share price-wise over the past several months, for example.

‌China is obviously important for many western advertisers and media platforms (if not necessarily the agency holding groups as I have flagged before) and there are several ways what happens there impacts these groups. The most obvious one namely the spend in the Chinese economy. China is the world’s second biggest economy and the biggest / second biggest (depending on whose view you believe) in population terms.

‌Then there are other factors. Chinese tourists are particularly important for luxury goods spending in markets such as Europe and are an economic force in their own right. There are also Chinese e-commerce companies such as Shein and Temu, which have aggressively advertised to western consumers—which was the main driver of Meta’s much better-than-expected 2023 revenue performance. Finally, and related, there is the advertising spend of Chinese companies more generally in western markets although that is relatively limited, especially post-the restrictions placed on Chinese handset manufacturers, for example.

‌So far, the omens do not look particularly good. The general macroeconomic data coming out of China is mixed, particularly on consumer spend—and that is being reflected in the comments from companies. Two of the major reasons Burberry cited for its recent profit warning was the depressed spend coming from Chinese consumers, and that Chinese tourism to Europe in particular, had not recovered to anywhere near pre-Covid levels. On a wider scale, Nike made reference to weaker Chinese consumer demand when it reduced its financial year sales guidance. We will hear more in the next few weeks as other companies report.

‌It is likely that the Chinese e-commerce companies will continue to spend aggressively in the West. Both the news that Shein is looking to IPO in New York and that PDD (Temu’s parent company) stated on its Q3 conference call post-a 92% year-on-year rise in revenues, that it is only at the start of its expansion strategy, suggests a continuation of their growth strategy. I expect in 2024 they will also widen their advertising strategy to include platforms such as television and outdoor. Yet, in a way, their strategy of aggressively targeting western markets could also be seen as a need to diversify their growth away from China, in the expectation of slowing consumer growth.

‌The key question, of course, is whether things change. At the moment—and it is very early days— 2024 is looking as though it may repeat the pattern of 2023. The Chinese authorities are pumping stimuli into the economy but many of the issues look as though they will take a significant amount of time to turn around including what is happening in the Chinese property sector (to which consumers have significant exposure), youth unemployment, slowing growth, and fears over demographic changes in the population.

‌Another factor is more general geopolitical factors such as what happens next with Taiwan and the risk of a trade war between the EU and China due to the rapid growth of Chinese EV automotive exports—a factor that has been cited by several luxury goods companies such as Remy-Cointreau and Pernod-Ricard—and where there is an obvious disconnect between the interests of EU nations given the car manufacturers are mainly German, and the luxury goods companies are mainly French.

‌A wider question will be how companies decide how to respond to this. As I mentioned, it is still very early days for 2024. China is still a very attractive market and many countries would be extremely pleased with c. 5% GDP growth. Nevertheless, for those western companies who placed China at the heart of their growth strategies, 2024 may not see much in the way of relief.

‌As usual, this is not investment advice.