Market Insights

Most investors know that big Nasdaq stocks have struggled lately. They may be less aware of the carnage in Chinese markets.

The iShares China Large-Cap ETF (FXI) has dropped 8 percent so far in March. That puts it on pace for the worst month in the last year. It also stands in sharp contrast to the U.S.-focused S&P 500 index, which is up 2 percent this month.

The wound appears to be self inflicted by officials in Beijing. On March 4, Reuters reported China was targeting economic growth of just 6 percent this year. That was a full 2 percentage points below expectations. The same day, South China Morning Post said major cities like Shanghai were cracking down on real-estate speculation.

Later in the month, Allianz noted officials were ending stimulus because China had recovered quickly from the pandemic. That’s a huge difference from the U.S., which just passed $1.9 trillion of stimulus and plans even more for infrastructure.

China’s stance is starting to reverberate across financial markets. Big rallies in copper and crude oil have stopped dead in their tracks. High-flying technology and e-commerce companies are crashing. This could have several implications for investors and traders. Here are some key negatives:

• Chinese technology stocks like Baidu (BIDU), Pinduoduo (PDD) and Bilibili (BILI) rose several hundred percent from last year’s lows. They now face the double-risk of weakness in the broader Nasdaq-100 and declines in Chinese markets.
• Energy stocks are the top performing sector so far this year, rebounding from huge losses in 2020. They initially benefited from a surge in crude-oil prices, but weaker growth in China could undermine that trend. Don’t forget that the world already has a glut of petroleum, and government data shows inventories rising more than expected for the last five weeks.
• Industrial metals like copper and steel have been rallying for the last year. They could also be susceptible to a Chinese slowdown. Big names include U.S. Steel (X) and Freeport McMoRan (FCX).
• Semiconductors enjoyed a surge of demand as coronavirus fueled demand for PCs, data centers and video games. While most signs indicate business is still good, investors shouldn’t forget that China consumes half the world’s chips. Slower growth there could have an impact.

Potential Benefits of Slower Chinese Growth

While slower growth in China would hurt some firms, it could actually be a net positive. After all, cheaper oil and commodities would hold back inflation. That would let Jerome Powell and the Federal Reserve keep interest rates down longer into the future.

It could also slow the recent spike in Treasury yields, which pulled money away from high-multiple technology stocks. There’s also been an impact on the housing market because mortgage rates are back to their highest levels since June.

While many investors may not think about China, it matters for financial markets. In fact, the 2011-2020 bear market in commodities partially resulted from the People’s Bank of China raising interest rates. Their goal then was also the prevent speculation — almost the same as today.

In conclusion, a new trend of Chinese weakness has emerged in March. It isn’t getting much attention yet, but it could have positive effects by slowing inflation and halting the recent surge in Treasury yields. Keep reading Market Insights for more in coming weeks.