Can China Reverse the Economic Crisis?

As you've probably seen over the past few months, China's economy has suffered some pretty serious setbacks, and its citizens have felt the impact. As this chart from Simply Wall Street shows, most sectors have been very deep in the red over the past 12 months.

Earlier this year, some banks froze customer deposits, leaving people unable to withdraw money from their accounts. The whole real estate sector is in crisis, as developers default on debt and construction projects across the country grind to a halt. Then, just to add salt to the wound, earlier this year, China imposed strict COVID lockdowns, which further restricted construction and economic activity in general. The result? Well, the economy choked, and Chinese citizens really lost out.

This sparked a wave of protests across the country, from people remonstrating outside of banks to others boycotting mortgage payments, and thousands shouting off balconies in protest as they were confined to their apartments. Despite making big news headlines a little bit earlier in the year, a lot of this stuff is still occurring even now. Just recently, videos circulated of unfinished apartment towers being demolished as developers ran out of money.

Despite the worst of the Shanghai COVID lockdowns being over, there are still many cities in China that are facing strict ongoing lockdowns. It's fair to say that over the past few months, things haven't looked great for China, and the decisions being made by the CCP are heavily impacting their citizens and the rest of the world. However, this could all be about to change; at least that's what everybody is hoping because it was recently reported that the CCP have put a date on the 20th National Congress.

Quote: "The political Bureau of the CCP Central Committee will propose the plenary session that the 20th CPC National Congress be convened on October 16th in Beijing." It's a big deal for China's future, and with so many question marks surrounding China and their economy right now, a lot of people both in China and around the world are eagerly waiting to see what will be said.

For those that don't know, the National Congress of the China Communist Party is a big deal. It's held every five years and is where the CCP's top-level leadership changes happen. It's also the formal event for changes to the party's Constitution. What also happens at this meeting is the party leader will outline economic policies and intentions for the next five years.

An official release said, quote: "The Congress will thoroughly examine the current International and domestic situation, take into account what the cause of the party and Country requires for its development on the new journey in the new era, as well as people's new aspirations to formulate action plans and fundamental policies."

The most pressing issue that is expected to be reviewed, which is definitely number one for China's citizens, is the roadmap for the easing of China's very extensive COVID lockdowns. As we've seen throughout the media this year, China has enacted by far the strictest COVID lockdowns of any nation. But many are anticipating that Xi Jinping will discuss China's return to normal plan at this Congress. If that would happen, it would obviously be a huge benefit for all of China's citizens.

But beyond that, it would also be huge for China's economy and the global economy. China's economy has slowed significantly due to these lockdowns. For example, in April, not a single car was sold in Shanghai. Factories were shut down; Tesla's giant Shanghai Gigafactory was closed for nearly a month back in March of this year.

Quote: "An estimated 345 million people across 46 cities were in full or partial lockdowns, a population accounting for 40 percent of GDP." Now, while it's not quite that bad anymore, for example, 96.3% of industrial businesses in Shanghai have now resumed work with a production rate of over 70%, there are still lockdowns occurring across China, which continue to disrupt the normal operation of their economy. Ultimately, if China is in lockdown, that's bad for us too.

We have to remember that China is the production powerhouse of the world, accounting for approximately 30 percent of the world's total manufacturing. They are the world's biggest exporter by a long way, and they account for 12 percent of all global trade. So whether you like it or not, the US and Europe need China to return back to normal to reduce the supply constraints and help their economies get back to normal.

As you may have seen, China's COVID lockdowns have caused massive backlogs at all their major ports. Now, while that sucks for China's economy, what it's also caused is a massive reduction in the supply of goods to Europe and to the US. Have a look at this: delivery delays for ocean freight have more than doubled since the start of the pandemic. Back in 2019, it took about 45 days for goods leaving a factory in China to get to a U.S. warehouse. Now, in 2022, the same journey is taking 111 days.

Ultimately, with the rest of the world opening up across the past year and demand resuming to normal, if not increased levels, the lack of supply out of China has been a big contributor to the brutal inflation we've all been experiencing. Demand high, but supply low—that's one way to get inflation. The other is obviously the massive amount of money printing by central banks around the world, but that is a topic for another video. Although technically, it fits into this video as well, as giving people freshly printed money is certainly one way to increase spending and thus the demand side of that inflation equation.

But overall, that is definitely one reason why all eyes will be on the National Congress in a month or so to hear what Xi Jinping says about reopening and getting China's economy back to normal. But another topic that the investing world will be hoping to hear discussed is how the CCP plans to treat their big corporations over the next five years.

As we've seen over the past year or two, China has cracked the whip on many of their large corporations with increased regulation and many fines dished out relating to antitrust. For example, Tencent, Alibaba, Baidu, and Didi have all copped antitrust fines over just the past couple of years. Tencent and Alibaba have both been forced to donate approximately 15.5 billion to Xi Jinping's Common Prosperity Fund.

Recently, China's market regulator blocked Tencent's planned merger with Huya and Douyu. And of course, who can forget the blocked IPO of Ant Financial? It's no secret that China has been very focused on increased regulation of their tech sector, and naturally, it's really spooked a lot of investors.

Now, there are also other factors at play here—granted, you know, delisting risks, etc.—but I still wanted to show you just what's happened to some of these stocks over the past few years. Alibaba is down around 70% from its high in 2020. Tencent is down 60% from its high in 2021. Pinduoduo is down 66% from its high, JD down 44%, and Baidu down 60%. They're actually so beaten down right now that many of them are considered significantly undervalued from a classic discounted cash flow analysis.

So much so that a lot of big-name value investors have been buying into some of these Chinese tech stocks. If you are interested in actually doing some analysis on these businesses and exploring how undervalued some of them actually are based on a discounted cash flow analysis, I've actually just put out a curated list of big-name U.S. listed Chinese stocks in partnership with Simply Wall Street.

So if you're interested, check out the link in the description, and you can check out everything from valuation to expected future performance, their past performance, their financial health, and even things like average management tenure, insider buying or selling, and their larger shareholders. And as always, a big thank you to Simply Wall Street for sponsoring the channel. As I always say, it's free to use forever. However, if you did want to get the full access, all areas past that, I've got— you can actually get an exclusive 40% off if you sign up with the link below. The first hundred people to sign up will get that offer, so if you've been on the fence, now is the time.

But anyway, back on track. As I said, while there are many factors influencing the share price declines of these big Chinese stocks, for example, the delisting risks, as I was just talking about, obviously a big chunk of their underperformance has still been thanks to the actions of the CCP and the underperformance of China's economy as a whole.

So investors will be listening attentively to what Xi Jinping has to say about China's economic policies for the next five years, as that will essentially mold the landscape that these businesses will have to work in over the medium term. I wouldn't expect these policies to be too specific; obviously, the details will then be passed down to the relevant policymakers to actually implement the specifics. But hopefully, the meeting provides a good update on the CCP's economic intentions over the next five years, so we as investors can have further clarity.

And speaking of relevant policymakers, as this is an event to reorganize leadership more than anything, there are set to be quite a few changes and retirements this time around, which will bring in some new leadership. However, one person that is set to remain is Xi Jinping himself. It's expected he will attract even more support within the party at this Congress. CNBC notes he will likely increase his share of political associates at the top two levels of the Chinese leadership.

According to Eurasia Group, which predicted the majority of his political associates holding seats on the Politburo will increase to 80 percent from 60 percent and rise to 57 from 43 in the Politburo's standing committee. Interestingly, Xi Jinping is expected to stay on for a precedent-defying third term in power, after he abolished the two-term limit back in 2018. So even though he is now technically past the party's scheduled retirement age, it is still expected that he will continue on for another term.

So there you have it, guys. That is what to expect at the National Congress in about a month's time. So definitely let me know what you think will happen and whether you believe this will be a good opportunity for the Chinese government to course-correct or clarify for the rest of the world. Will much change? Definitely let me know your thoughts down in the comment section below. Leave a like on the video if you did enjoy it; subscribe if you'd like to see more. But guys, that will do us for today. Thanks very much for watching. See you guys next time.