China price wars help spark US$157 billion rout in mainland consumer

Gauges of consumer stocks have been the worst performers on the MSCI China Index since the end of September, after the real estate measure. The aggregate market value of companies included in the two consumer indexes has fallen by about US$157 billion since.

Consumer stocks have been the worst performers on the MSCI China Index since the end of September 2023. Photo: Shutterstock

The biggest drags on the MSCI benchmark in this span include e-commerce giant Alibaba Group Holding, restaurant operator Yum China Holdings and EV maker BYD Co – which have all been offering big discounts. Alibaba owns the South China Morning Post.

The world’s second-largest stock market has started 2024 on a dismal note, with the MSCI China gauge already down more than 4 per cent so far this year. It capped a third straight annual decline in 2023.

“The bigger picture is that the weak demand is leading to a deflationary environment, which particularly bodes ill for businesses that cannot achieve higher volumes with lower prices,” said Daisy Li, a fund manager at EFG Asset Management HK.

The EV industry has been among the worst hit by intense competition as growth slows, with Chinese makers following the lead of Tesla in lowering prices to boost sales. BYD and local peers including Xpeng and Li Auto have shed billions of dollars in market value in the past few months.

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“Retail prices are falling fast,” Morgan Stanley analysts wrote in their 2024 outlook report for the Chinese EV sector. “While local brands, in general, have fared better than luxury and foreign brands in terms of widening discounts, we expect discounts to further widen into the first quarter this year on the back of seasonality effects.”

Even China’s vaunted internet giants have been impacted, with Alibaba and JD.com seeing their stock prices tumble, as they wage a fierce battle for market share. The price war has made US-listed PDD Holdings, operator of discount sites Pinduoduo on the mainland and Temu, one of the rare bright spots in China’s e-commerce industry.

Many economy and market observers are hoping for interest-rate cuts and government spending to help prevent the nation from entering a deflationary spiral.

Fund managers have said the next catalyst they are watching is pricing and sales data around the Lunar New Year in February, which will offer more clues on consumer confidence.

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The next few weeks may also be key for policy action, given Chinese leaders will soon gear up for the National People’s Congress. That annual legislative session, held in March, is where the government is expected to announce its official growth target for 2024.

A Morgan Stanley survey conducted late last month suggests seasonally better consumer sentiment ahead of the holidays. However, “sustainability is in doubt amid slowing economic recovery”, analysts including Lillian Lou wrote in a note.

Salary cuts and job losses have remained among the top concerns of households, they wrote, adding that the number of consumers anticipating the economy to worsen ticked up by two percentage points from November to 13 per cent.

In all, there is little hope for a quick fix. Citigroup expects consensus estimates to fall for Li Ning and Anta Sports Products around the upcoming results season, hurt by foreign competition and pushes into lower-tier cities with cheaper products.

Fast-food companies are still locked in a protracted fight for customers, with some offering full meals for around US$3. It is difficult to make money at such low prices.

“We expect industry margins to erode until the irrational price war ends,” Kevin Yin, an analyst at JPMorgan Chase & Co., wrote in a note, while cutting estimates for Yum China. “No player is immune” to the headwinds created by the nation’s slowing demand growth, he said.

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