China’s Year of the Wood Dragon, traditionally associated with success and vitality, has pivoted into a year of deflation. The world’s second-largest economy has now faced five straight quarters of deflation — with Morgan Stanley analysts dubbing it China’s “public enemy #1.” The implosion of China’s real estate market, a backbone asset, has tightened consumption and investment, pushing the country toward a dangerous spiral.

• This pullback in consumption has led to a nearly two-year collapse in Chinese manufacturing prices — dragging wages down as corporate profits shrink, further threatening consumer spending.
• As domestic demand weakens, foreign markets become a lifeline for China — but surging exports have triggered new European trade barriers. The CIO of Europe’s largest asset manager, Amundi, expects enhanced US tariffs regardless of the next president-elect.

Investor exodus: As China’s economic troubles grow, investors are pulling out, leaving the CSI 300 index down ~7% YTD, starkly contrasting the S&P 500’s 18% gain. “No one is interested in buying Chinese assets,” says Amundi’s CIO. Chinese startup funding has also plummeted, with only ~1.2K new startups last year — a sharp drop from 2018’s peak of ~51.3K. As we progress through the Year of the Wood Dragon, China’s fortune cookie has spoken — revealing economic misfortune.