TheChek News Flow

Some estimates and theories

China’s stimulus

The Chinese government’s decision to boost the stock market with monetary stimulus resulted in a buying frenzy. Shanghai and Shenzhen’s CSI 300 index jumped 25 per cent and Hong Kong’s Hang Seng index leapt 21 per cent in just two weeks. But things have cooled off since:

When the stimulus was first announced, we argued that for this rally to have legs, the Chinese government would need to incentivise consumer spending and put money directly into the real economy. While the government has signalled that fiscal stimulus is coming, it has been sparing with the details — much to the frustration of investors.

It remains unclear what President Xi Jinping and his government want from the stimulus effort. Some believe that they intend to address the structural problems in the economy. Another possibility is that the government just wants to make sure to hit its 5 per cent GDP growth target this year. Others feel that the effort will be merely cosmetic, aimed at making China’s markets look more appealing. It’s hard to tell which view is correct. While Xi has been known to be sceptical of stimulus in the past, the ministry of finance just laid out a substantive four-part stimulus framework (support real estate investment, address local government debt, boost bank lending into the real economy, and support consumers).

How much stimulus would be enough to get the Chinese economy out of the doldrums?

Start with real estate. The government has announced that it will issue bonds to local governments to allow them to buy back idle land and unsold new homes from developers. One detailed estimate from the French bank Natixis says that would cost about Rmb3tn ($421bn), assuming that the government will buy the properties at 70 per cent market value, which may not be the case.

Next, local government debt. Local governments have a lot of “hidden” risky debt on their balance sheets due to falling real estate values and the shuttering of companies during Covid; estimates range from Rmb50tn-Rmb80tn ($7tn-$11tn). According to reporting from Bloomberg out yesterday, China is considering allocating Rmb6tn ($853bn) through to the end of 2027 to help resolve risky local debt.

The other two priorities — bank lending and consumer support — are even harder to put numbers to. The government has said little of substance. But past stimulus provides clues to what Beijing might be prepared to do across the framework, if there is a real sense of urgency. After the great financial crisis, the Chinese government issued Rmb4tn (about $580bn at the time) of stimulus over a few years. Putting that in today’s GDP terms, that would be about Rmb16tn ($2.2tn). But, given the government’s reticence to put out official numbers, we doubt they will pursue stimulus of quite that scale.

Quantifying the stimulus needed to hit 5 per cent GDP growth is more straightforward. Economists polled by Reuters predict that, at the current trajectory, China’s annual growth rate will be 4.8 per cent at year’s end. Assuming that trajectory is right, the gap between hitting China’s 5 per cent target and the current path is about Rmb252bn of additional output by year’s end, or $35bn. China could try to take the “easy” way out by reaching that directly, either through government purchases or direct investments (as we stated in the past), or by doubling down on its current efforts to boost exports.

But, according to Eswar Prasad at Cornell University, formerly the head of the IMF’s China division, “[while] fiscal stimulus in the range of half to 1 per cent could be powerful and help achieve this year’s growth target, it is not going to fundamentally alter the trajectory of household consumption or private investment, both of which the [Chinese economy] really needs”.

What if the goal is simply to support the animal spirits behind markets? “The markets want this instant gratification, such as [the central government] spending 1-2 per cent of GDP in the next 12 months,” said George Magnus of the China Centre at Oxford university. While Magnus doubts the government actually wants to stimulate the economy in the ways markets expect, it is possible that Beijing can just try to signal to investors that it is serious with a one-time “bazooka” of cash, to the tune of Rmb1tn-Rmb2tn (1-2 per cent of 2023 GDP, or $140bn-$280bn). The government could also satisfy investors by tacking on other gestures, such as issuing more business visas, or scaling back its crackdowns on western businesses.

The ambiguity about what the government hopes to achieve, and what means it will use to achieve it, leaves only one option for serious investors interested in Chinese equities: wait and see. The backbone of any effective intervention in the economy or markets is clear communication. Without it, there cannot be investment, only speculation.

ASML shares drop sharply after warning on semiconductor recovery

Gloomy outlook from Europe’s most valuable tech company drags down stocks from Nvidia to Arm

Shares in ASML led a tech rout on Nasdaq on Tuesday after the chip equipment maker warned of a slower recovery in the semiconductor market, in results accidentally published a day early.

The Dutch chipmaker cut its outlook for next year after reporting orders that were only half as much as investors had expected for the third quarter.

Chief executive Christophe Fouquet warned of “customer cautiousness” and a “more gradual” recovery in all areas beyond artificial intelligence.

The disappointing results, which had been scheduled for release on Wednesday, were briefly published on its website on Tuesday before being deleted and then republished 30 minutes later, with ASML blaming a “technical error”.

ASML’s stock was down almost 17 per cent in early afternoon trading in New York as its gloomy outlook reverberated throughout the tech sector.

Shares in US chipmakers Nvidia — which on Monday hit a new all-time high — and AMD were down about 5 per cent, Broadcom was down 3.5 per cent and chip designer Arm was 6.5 per cent lower following the news.

ASML said that its total net sales for 2025 would be €30bn-€35bn, with a gross margin of between 51 per cent and 53 per cent. It had previously said that revenues could be as high as €40bn for the year, with 54 per cent to 56 per cent gross margins.

Europe’s most valuable tech company is the dominant provider of the precision chipmaking machines that Taiwan Semiconductor Manufacturing Company, Intel and Samsung Electronics use to produce their most advanced semiconductors.

Net bookings — a measure of orders placed by ASML’s customers — were €2.6bn for the third quarter, far lower than the more than €5bn that analysts had expected. Analysts at Stifel said in a note to clients that the order intake was “very weak”.

Challenges at Intel and Samsung appear to have contributed to ASML’s underwhelming results.

Intel is racing to cut costs by reducing headcount and delaying investments in new production facilities after it reported disappointing results in August. This month, Samsung acknowledged it was facing a “crisis” after falling behind in AI chipmaking, as a downturn in the memory market looms.

In a pre-recorded interview published on Tuesday, ASML’s finance chief Roger Dassen said “very specific competitive issues in the foundry business” had contributed to a slower recovery in those chip markets that were not benefiting from booming demand for AI computing infrastructure.

“The strong performance of AI clearly continues,” he added.

Dassen also said ASML expected its sales to China to fall next year, from almost half of revenues in the third quarter to “around 20 per cent”.

Shipments to China of ASML’s most advanced lithography machines have been restricted by the Dutch and US governments over the past year, in an effort to constrain Beijing’s ability to develop AI systems. Nonetheless, Chinese chipmakers have still been importing its older equipment as they expand production of the less sophisticated processors used in household appliances and industrial equipment.

LVMH quarterly sales drop as luxury group warns of ‘uncertain’ outlook

Sales at core fashion and leather goods unit down 5%, missing consensus

LVMH’s sales fell in the third quarter as the world’s largest luxury group contended with ebbing luxury demand in what it described as an “uncertain economic and geopolitical environment”.

Group revenues at the conglomerate controlled by French billionaire Bernard Arnault dropped 3 per cent to €19.9bn, below consensus estimates that sales would be up 1 per cent.

Sales in the core fashion and leather goods division, which is seen as a bellwether for the industry, fell 5 per cent year on year compared with the same period a year ago, underperforming Visible Alpha analysts’ consensus of 1 per cent growth.

The company said the decline in growth in the third quarter “mainly arose from lower growth seen in Japan, essentially due to the stronger yen”.

Pressure on sales in Asia outside of Japan continued to weigh down on LVMH, with sales in that region falling 16 per cent in the third quarter.

With more than 75 brands, LVMH spans luxury segments from the closely watched fashion and leather goods division to watches, jewellery and travel. 

Privatisation is not the solution for every situation but it can be highly effective in many cases

I listened on Monday with great interest at the UK government’s International Investment Summit, as ministers, investors and the best of British business shared their plans on how to reinvigorate the economy through infrastructure investment. They certainly face a challenge. In the UK, infrastructure is frequently the subject of public frustration. Something has to change. As the government considers reforms and how to fund much-needed upgrades to roads, water, public transport and digital services, there are three key lessons from my home country, the US, that could inform their approach.

The first is that the UK model works. It needs updating, not a complete overhaul. This is a timely issue given the crises surrounding Thames Water and the growing calls to move away from private ownership in the water sector, and perhaps infrastructure more broadly.

The US has resisted infrastructure solutions that the rest of the world has adopted, especially those involving the private sector. In the US, 90 per cent of the water sector is publicly owned by cities, municipalities, or regional authorities — roughly 50,000 entities in total. According to the American Society of Civil Engineers, the state of this infrastructure is far from ideal. Clean water infrastructure earned a grade of C+ and wastewater infrastructure a D+. Two million Americans don’t have access to clean drinking water.

Airports tell a similar story. In Europe, over 40 per cent of airports have some level of private ownership, while in the US, nearly all are government-owned. Their rating? Also D+.

The second lesson from the US is that believing a government can spend or tax its way out of an infrastructure shortfall is wishful thinking. Private capital has to play a role. The US’s $1.2tn infrastructure bill, for instance, covers only a third of the funding required simply to restore the nation’s systems. It does not include the cost of building the new ones so desperately needed to spur economic growth. With a US budget deficit exceeding 6 per cent of GDP and debt to GDP over 120 per cent, there is no appetite to invest further.

Here lies the third and final lesson for Britain: until the 1930s, much of the US’s infrastructure was privately owned and operated. The Depression and second world war created conditions where greater government intervention made sense. But the temporary shift has since fossilised, largely due to inertia and ideology. The UK should avoid making the mistake of turning its back on privatisation altogether — it’s not always the solution for every situation but it can be highly effective in many cases. 

In my recent book, Build, I argue that the US needs a new model to invest in infrastructure — one that includes the private sector through public-private partnerships. The US should look to examples from the UK, Europe, Australia and even China, where such partnerships are already in place. 

No serious advocate of privatisation suggests it should be embraced blindly. These are complex legal arrangements that succeed or fail based on regulatory provisions, financing mechanisms and enforcement. But thanks to decades of experience and advancements in technology, the partnerships can now be structured, monitored and enforced more effectively than ever before.

The truly grim reality is that governments cannot afford the infrastructure needs of the coming decades. This includes protecting national security, making infrastructure more resilient to climate change, developing new power generation systems to support renewable energy, integrating battery storage and meeting the growing energy demands of artificial intelligence technologies. 

What I heard on Monday was a focus on opportunity and maximising the UK’s strengths. Ultimately, practical, long-term solutions are more likely to come from thoughtful reform that applies real-world lessons, engages the private sector and utilises private capital. Ideological slogans can be politically expedient but they are not going to reinvigorate the UK economy in the way that it wants or needs.