ASX-listed stocks in the eye of China’s economic slump

Mounting revelations that China could be in for a slowdown even worse than 2020 is further bad news for many ASX-listed stocks heavily reliant on this economy.

Despite ambitious economic targets set by China’s government at the start of the year, growth has been underwhelming with many major banks now questioning whether 3% is even doable.

Producer-price inflation, which measures factory-gate prices charged by Chinese manufacturers, came in at 2.3% in August, down from 4.2% in July and marked the 10th straight month of slowing price growth.

Covid Zero is taking its toll

Severely hamstrung by the covid zero policy of lockdowns and a mass testing regime, growth projections for China’s economy have crashed from the official target of around 5.5% six months ago.

According to one survey, Bloomberg, the consensus is now for the economy to expand by 3.5% this year - less than half the 8.1% growth of real gross domestic product (GDP) in China in 2021.

To put this downturn into context, China’s annual GDP growth rate averaged 9.09% from 1989 until 2022 - hitting an all-time high of 18.30% in the first quarter of 2021.

Housing and consumption

Key factors underpinning China’s economic slowdown include droughts – that have threatened crops and hit power supplies in key industrial areas - a housing market collapse and both weaker domestic and overseas demand.

Based on what she described as “deeper and longer property contraction, "intensified covid lockdowns, and slowing external demand,” Barclays’s chief China economist Jian Chang, recently trimmed her full-year growth forecast to 2.6% from 3.1%.

Given the protracted cash crunch currently confronting developers, Jian Chang isn’t expecting a meaningful recovery in home sales any time soon.

ASX-listed stocks caught in the crosshairs

China’s slowdown serves as a timely reminders to investors that the earnings of many ASX-listed stocks are materially linked to the fortunes of this single economy.

While a lot of ASX-listed stocks do business with China, here’s a handful of those stocks that appear to be most exposed to a serial economic downturn.

Treasury Wine Estates Ltd (ASX: TWE). Has put a lot of time and effort into building a market for its quality Aussie wines in China, and prior to tit-for-tat tariff increases and subsequent export bans, around 40% of its earnings came from Asia alone.

A2 Milk Company Ltd (ASX: A2M), Bubs Australia Ltd (ASX: BUB) and Synlait (ASX:SM1) have made major inroads into this infant formula market, which could be exposed to any decline in consumer demand.

Iron ore exporters: Fortescue Metals Group Limited (ASX: FMG), Rio Tinto Limited (ASX: RIO) and BHP Group Ltd (ASX: BHP) are likely to be impacted by a slowing in industrial production growth for July of 3.8% year over year, while economists had projected 4.3%.

Due to lower steel production in China, as the government placed constraints on the industry in a bid to reduce carbon emissions, China imported a total of 1.12bn tons of iron ore in 2021, down slightly from 1.17bn tons in 2020, according to government data.

Given that Australia is the largest iron ore supplier to China, accounting for 67% of China's total imports in January-July, any material fall in construction and infrastructure investment would have a knock-on effect for local iron ore majors.

Similarly, ion ore majors would also be direct beneficiaries of the China economy reopening.

Other stocks with varying exposures to China across different sectors include:

• Aumake Limited (ASX: AUK)

• Blackmores (ASX: BLK)

• Clean Seas (ASX: CSS)

• Digital Wine Venture (ASX: DW8)

• EVE Investments (ASX: EVE)

• Fonterra Fund (ASX: FSF)

• Iluka Resources (ASX: ILU)

• Tassal Group (ASX: TGR)

• Mount Gibson Iron (ASX: MGX)

• Zoono (ASX: ZNO)