CHINA’S ECONOMY STAGNATING
New data shows China’s post-COVID economic recovery has vanished and is now weakening across a broad range of sectors, leaving it “teetering on the brink of deflation,” CNBC reported.
“The external environment is becoming more complex and severe and the slowdown in global trade and investment will directly affect the recovery process of our country’s economy,” premier Li Qiang told a 16 June State Council meeting.
This year through 31 May, private-sector investment in China ticked down 0.1 percent, pulled down by a 10-percent annual decline in property investment, HSBC reported.
The significance: aside from the early days of the COVID War in late 2019 and early 2020, it was the first time that had happened in almost 40 years.
The private sector had grown an average of 6.7 percent annually in each of 2017, 2018, and 2019. Property development had come to be almost a third of the economy’s annual GDP.
The real estate industry’s poor performance underlies the current weakness across the entire economy, many analysts say.
“Property is, at this point, jeopardizing the entire economic recovery,” China analyst Chris Beddor at research firm Gavekal Economics, said to the Financial Times.
The property development industry crashed in fall 2021 as overleveraged developers defaulted on loans and stopped building, stranding buyers who had taken out mortgages but then had no homes to move into.
The industry recovered to a degree in this year’s first quarter, but sagged again in May: home completions were just 24 percent, down from 42 percent in April, Gavekal noted.
“The danger is that the property-market weakness drags on overall economic growth, loosening the labor market and in turn reducing income and spending growth—in other words, stalling the engine of the economic rebound,” economists at Gavekal wrote in a 15 June note.
The central bank is expected to lower its interest rate this week that benchmarks mortgage interest. Economists also have called for easier borrowing for developers so they can finish projects and also for lower down payments required from home buyers.
Exports—key to China’s growth during the past two years—also have stalled, due largely to the global economic slowdown. After gaining 8.5 percent in April, the dollar value of outbound shipments slumped 7.5 percent in May, while economists polled by Reuters had predicted only a 0.4-percent dip.
The drop has spilled over more broadly into the country’s manufacturing sector, the FT noted.
Business investment in fixed assets grew by 4 percent over the period, not the 4.4 percent analysts had forecast.
“The manufacturing sector is dead on its feet,” Asia-Pacific research chief Rob Carnell at ING told the FT.
Regulatory crackdowns on the education, finance, and tech sectors in recent years have left entrepreneurs leery of beginning new ventures, not only in those areas but in any industry.
However, “the real barrier to a growth recovery is a lack of [consumer] confidence,” Ting Lu, Nomura’s chief China economist, wrote in a recent note.
The government’s official gauge of consumer sentiment registered 94.9 in March, down from a peak of 124.1 in March 2019.
Retail sales grew 12.7 percent in May, but that missed analysts’ forecast of 13.6 percent and was barely two-thirds of April’s 18.4-percent jump.
Urban disposable income grew 6 percent from 2020 through 2022, compared to an 8-percent annual bump from 2015 through 2019.
Many households are working their way out from under deep debt, leaving them little to spend or invest, CNBC reported.
Under a cloud of economic uncertainty, only 6.83 million Chinese couples married last year, the fewest since the government began recording the number in 1986.
Unemployment among recent college graduates and people aged 24 and younger has reached a record 20.8 percent—a group that has accounted for as much as 20 percent of consumer spending in the past.
Also, China’s elderly population is growing faster than its number of young people, presaging a smaller workforce to fund care for a burgeoning generation no longer employed.
“Consumers have to wait until they get better job security and income expectation[s],” Helen Qiao, Bank of America’s chief China economist, said in a 15 June CNBC interview. “Then they will be more comfortable to spend more.”
Infrastructure spending, long a staple of Beijing’s growth strategy, expanded by 8.8 percent last month, year on year, less than the 10-percent pace a year earlier.
The government had reined back spending for public works as the country’s debt reached 126 percent of GDP, amounting to the equivalent of about $23 trillion, as we reported in “China’s Not-So-Little Secret: Government Debt Exceeds GDP” (18 Apr 2023). Some officials called the mounting debt a national crisis.
UBS Bank has cut its 2023 growth estimate for China from 5.7 percent to 5.2. JPMorgan has lowered its expectation to 5.5 percent and Standard Chartered to 5.4. Nomura pegs the country’s growth rate at 5.1 percent this year and just 3.9 percent in 2024.
However, the newly reduced projections still exceed China’s official growth target of 5 percent—once seen as an easy reach but that now seems increasingly in jeopardy.
TRENDPOST: China’s “dual circulation” economic plan that balances a robust export manufacturing sector with a thriving consumer economy has flopped.
The global economic slowdown has neutered export manufacturing; China’s culture of thrift, combined with recent economic turmoil, has left consumers sitting on their wallets.
China may still hold the vision of a dual circulation economy, but solving the problems that now prevent it will take years. See “Beijing Readies Broad Stimulus Measures to Rescue Floundering Economy” in this issue.
And we have long detailed China’s real estate decline in articles such as “China’s Real Estate Market Teeters on Evergrande’s Debt” (21 Sep 2021), “China’s Real Estate Troubles Ripple Across Emerging Markets” (26 Oct 2021) and “China’s Real Estate Crisis Grows” (9 Nov 2021), among others.
Again, by launching the COVID War in 2020, on its Chinese Lunar New Year, “The Year of the Rat,” and its three years of zero-COVID policy which locked down the nation and destroyed the lives and livelihoods of hundreds of millions… Beijing single-handedly destroyed its economy.
CHINA CONVENES “URGENT” MEETINGS OVER STALLED ECONOMY
Senior Chinese government officials are meeting with economists and business leaders to gather advice on how to revive China’s flagging economic recovery, Bloomberg reported, saying that those consulted characterized the meetings as “unusually urgent in their tone.”
Two people who attended several meetings said the officials acknowledged the economy is in critical condition and “displayed an impetus to finding solutions [attendees] hadn’t seen before,” Bloomberg added.
“Officials are clearly aware that the economy is not booming and animal spirits remain sluggish,” Christopher Beddor, China researcher at Gavekal Dragonomics, said in a Bloomberg interview.
Business leaders were concerned that officials were not attending to their worries with enough haste, he added.
China’s post-COVID economic recovery shows lingering damage from consumers’ fears of the future, leading them to save instead of spend; and from a series of sudden, harsh policy crackdowns, especially in the tech, financial, and real estate sectors.
Officials were casting for ideas that will stimulate consumer confidence, reinvigorate the real estate industry, persuade foreign companies and investors to return or expand their holdings, and stimulate the economy overall, according to some who were asked for advice.
Many consultants urged the government to stop trying to drive growth through planning and shift to a more free-market orientation, they said.
At a meeting of top government officials and about 10 business leaders and economists earlier this month, the group reached a consensus that more monetary and fiscal stimulus are needed. Those two aspects also need to be better coordinated, the group agreed.
As part of the newly aggressive approach, the central bank made a surprise cut to interest rates last week. Officials also are readying a broad package of stimulus measures, particularly for the real estate market, people familiar told Bloomberg. (See “Beijing Readies Broad Stimulus Measures to Rescue Floundering Economy” in this issue.)
China’s GDP will grow “significantly faster” this quarter than the 4.5-percent rate in the previous one, the National Statistics Bureau predicted.
However, “the international environment is still complicated and severe” and “the foundation for economic recovery is not yet solid,” it cautioned.
China’s problems may run deeper than lower interest rates or government spending can reach, some observers warned.
Stanley Druckenmiller, hedge fund manager and founder of Duquesne Capital, has long been bullish on China and said the country’s economic energy before the COVID era was “New York on crack.”
His view has now changed.
Regarding China’s return to its past vitality, “looking out 10 or 15 years, I just don’t see it,” he said at the Bloomberg Invest Conference earlier this month.
“Unless there’s a change in power at the top, I think that’s going to be a very undynamic economy,” he explained. “We’re expecting a sugar high and some kind of robust growth there for the next six to nine months, but looking out, I do not look at [China] as a big challenge to the U.S. in terms of economic power and growth.”
“Things will improve in 2023, and then you’ll have the same structural issues slow things down in 2024 and 2025,” Leland Miller, director of the China Beige Book economic survey, told Bloomberg.
Those issues include an aging workforce, a weak culture of consumer spending, and a long-term over-reliance on infrastructure projects to drive growth.
“Then people will stop paying attention to the cyclical and start paying attention to the structural problems, which are a feature of the economy for years to come,” he said.
TREND FORECAST: Please see our trend forecasts and trends analysis in the ECONOMIC OVERVIEW section of this issue of The Trends Journal and the above article, “CHINA’S ECONOMY STAGNATING.”
WILL BEIJING NEW STIMULUS MEASURES RESCUE FLOUNDERING ECONOMY?
Chinese officials are preparing a broad array of stimulus measures across several sectors to revive the nation’s economy, which has stalled following a brief growth spurt early this year after harsh anti-COVID strictures were lifted.
Consumer spending, exports, real estate, manufacturing, and business and private sector investment all have slumped, as we report in “China’s Economy Stagnating, New Data Shows” in this issue.
For the first time since August 2022, the People’s Bank of China (PBOC) cut its key interest rate last week, nudging it from 2.75 percent to 2.65 for one-year loans.
The move followed the bank’s decision earlier this month to trim its seven-day reverse repurchase rate from 2.0 to 1.9 percent.
In addition, last week the country’s largest commercial banks cut the interest rates they pay on deposits, a prod to people to spend more of their money instead of saving it.
The government also announced a spate of tax breaks for businesses.
That’s only the beginning.
“In order to restore confidence, the government must do more,” Keyu Jin, an economist and China specialist at the London School of Economics, said in comments quoted by The Wall Street Journal.
“The size and scale of the stimulus has been lacking,” she added.
Investments in real estate—a foundation of the country’s economy—remain weak, suggesting that “authorities are unlikely to stop at monetary easing,” Louise Loo, Oxford Economics’ chief China analyst, wrote in a note last week.
“While investments have been state-led so far, it has not been effective in [drawing in] private investments or lifting overall business sentiment,” she added.
Beijing must prioritize bolstering the real estate market, Tao Wang, UBS’s chief economist for China, told the Financial Times.
Real estate accounts for as much as 30 percent of China’s GDP and is a central factor in households’ net worth.
Without stabilizing the property industry, “it’s very hard to stabilize the economy as a whole,” she added.
That could mean a stimulus program to encourage home buyers, an expanded program of public housing, and making it easier for developers to borrow, Loo noted.
Officials also are considering measures that would encourage people to buy more than one home, despite government scoldings during the ongoing real estate crisis that “houses are for living in, not for speculation.”
“They probably are considering an overall stimulus package to boost not only investment but also consumption,” Helen Qiao, Bank of America’s chief China economist, said in a 15 June CNBC interview.
Officials are mulling running a deeper budget deficit, she added. Some economists are urging Beijing to send checks to every household, as the U.S. government did during the COVID War, The Wall Street Journal reported.
The best way to bolster the economy is to stimulate consumer demand, which would add jobs, raise wages, and boost consumer confidence that could eventually lift the property market and manufacturing industry, economists told the FT.
Many analysts expect the government to resort to more infrastructure spending, its go-to source of economic growth in past years, the FT said.
Beijing is thinking of issuing $1 trillion yuan—about $140 billion worth—of treasury bonds to fund yet more infrastructure construction, insiders told The Wall Street Journal.
However, such projects are “likely to yield diminishing returns while increasing debt,” economists said to the WSJ.
Local governments also are desperate for help.
In the past, local jurisdictions have raised needed additional revenue largely by selling land to developers. Because of the property crisis, that market has dried up.
To help offset the loss, some local and regional agencies have jacked college tuition by as much as 54 percent now that a record number of students are enrolling, Business Insider said.
However, recent grads face a record unemployment rate; some have taken to posting Instagram photos of themselves lying face down on the ground to express their despair.
The private sector holds 80 percent of the country’s jobs. If it fails to revive, the unemployment rate among that key demographic will increase, slowing growth even more.
China’s clean-tech and electric vehicle manufacturing industries have grown by double digits this year, but those industries alone will be unable to soak up enough workers to solve the unemployment crisis, analysts at JPMorgan wrote in a 15 June note.
Beijing must take action to “restore confidence among private entrepreneurs and promote market-oriented reforms” and maintain a “stable policy environment,” they added.
Still, “it could take two or three years to shore up a slowing economic recovery and regain a higher potential growth rate with more balanced growth drivers and a stronger internal impulse,” Bruce Pang, chief economist at JLL Greater China, said in a CNBC interview.
“Switching to policy stimulus with large-scale easing would be the first imperative,” he added.
TREND FORECAST: Please see our trend forecasts and trends analysis in the ECONOMIC OVERVIEW section of this week’s Trends Journal and the above article, “CHINA’S ECONOMY STAGNATING.”