Challenges in the Chinese Stock Market and the Struggles of the Oil Industry in 2023

One notable absence at this year's global stock market celebration was China. Despite 2023 being the best year for global stocks since before the pandemic, with markets in the United States, Europe, Japan, and India experiencing strong rallies, investor sentiment towards China has soured. The world's second largest economy has been hindered by a series of issues, including a real estate crisis, sluggish consumer spending, and high youth unemployment.

The year has seen a decline of over 11% for China's blue-chip CSI 300 index and nearly 14% for Hong Kong's Hang Seng index, while the MSCI World index is poised to finish the year 22% higher, marking its largest annual increase since 2019.

In the US, the S&P 500 index is set to end the year with a growth of almost 25%, and Europe's Stoxx 600 index is on track for a 13% increase. Japan's Nikkei 225 index has surged 30% since the beginning of the year, and India's benchmark Sensex, which tracks 30 large companies, has seen a climb of nearly 19% this year.

People walk on a street at the end of the workday in Beijing on March 17, 2023. (Photo by GREG BAKER / AFP) (Photo by GREG BAKER/AFP via Getty Images)

Greg Baker/AFP/Getty Images/File

Chinas economy had a miserable year. 2024 might be even worse

The rebounding stock market is attributed to the decline in inflation, leading investors to anticipate interest rate cuts by global central banks. Additionally, there is growing excitement about the potential of artificial intelligence to generate significant returns for companies.

India's economy has seen positive gains due to optimistic forecasts, and Japanese stocks have also seen growth due to their favorable valuations and a weakening currency.

Despite lifting its strict coronavirus lockdown policies in late 2022, China's economy has not experienced the anticipated strong rebound that many investors had hoped for. Throughout 2023, sluggish demand has led to limited consumer price growth, and there is concern about the potential for a deflationary spiral. Additionally, increasing scrutiny from Beijing has caused foreign companies to reconsider their operations in China, leading to departures from the country.

The future doesn't look promising either. According to the International Monetary Fund (IMF), China's growth rate is projected to be 5.4% in 2023 and is expected to decrease to 3.5% in 2028 due to various challenges such as low productivity and an aging population.

Oil prices down

Derek Scissors, a senior fellow at the American Enterprise Institute, a center-right think tank, told CNN this month that the 2024 challenge for the Chinese economy will not be GDP growth, which is projected to be above 4.5%. Instead, the challenge will be that the only direction from there is down.

The declining Chinese economy has contributed to significant drops in oil prices this year. The global oil benchmark, Brent, is expected to decrease by nearly 9% to trade at approximately $78 a barrel, and the US benchmark, West Texas Intermediate crude, is projected to drop by over 10% to about $72 a barrel.

With 71% of its oil consumption coming from foreign countries, China is the world's largest oil importer. Recent signs of decreased demand in China have led to investor sell-offs. Additionally, record-breaking oil production in the United States this year has contributed to the decline in prices. The US Energy Information Administration anticipates that the country's crude oil output will reach an all-time high of 12.9 million barrels per day on average this year, and is projected to hit another record average of 13.1 million barrels per day in 2024.

Goldman Sachs recently lowered its projection for next year's average oil price by 12% due to increased US production. This comes as OPEC+ announced plans to extend a supply cut of 2.2 million barrels per day into the first quarter of next year in an attempt to support prices, despite the ongoing decrease.