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CHINA WILL EXCEED 2023 GROWTH FORECAST, IMF SAYS
China’s economy will end this year with a 5.4-percent growth rate, the International Monetary Fund (IMF) has projected, increasing its outlook for the country from the 5 percent it had foreseen in its October forecast.
In 2024, the nation’s GDP will expand by 4.6 percent, the agency said, also an improvement over its earlier 4.2-percent prediction.
The IMF’s outlook brightened after Beijing decided to issue about $137 billion worth of bonds, largely for more public works, and allowed local governments to issue some of their 2024 bonds earlier in 2024 than planned.
“We have revised up growth…reflecting … the new policy support,” Gita Gopinath, IMF’s First Deputy Managing Director, said in a press briefing announcing the new figures.
However, China’s growth rate will grind down to about 3.5 percent by 2028 due to poor productivity amid an aging population, she added.
External factors also will work against steady growth, as we detail in “Global Factors Weigh Against China’s Future Growth” in this issue.
Gopinath also urged China’s government to take additional measures to resolve the two-year-old crisis in the real estate market.
The measures should include “accelerating the exit of non-viable property developers, removing impediments to housing price adjustment, and increasing central government funding for housing completion, among other measures,” she said.
The property market’s crash and local governments’ overwhelming debt load could steal much of the country’s long-term growth potential, analysts have warned.
Local governments hold about $12.6 trillion, equal to roughly 76 percent of China’s GDP in 2022, compared to 62.2 percent in 2019, Reuters reported. China’s Politburo, the ruling inner circle, is formulating measures to reduce economic risks posed by local governments’ debt, it said in July.
“The central government should implement coordinated fiscal framework reforms and balance-sheet restructuring to address local government debt strains, including closing local government fiscal gaps and controlling the flow of debt,” Gopinath emphasized.
“Improvements to local governments fiscal transparency and risk monitoring are necessary to prevent new vulnerabilities emerging,” she added, noting that “financial stability risks are elevated and still rising.”
TRENDPOST: China can boast about meeting or exceeding its growth target but it was the lowest bar for annual growth the government had set in almost 40 years.
China’s economy will continue to struggle until the government makes massive policy revisions to tackle structural issues that include:
- a consumer culture that values thrift instead of spending;
- an oversupply of manufacturing capacity;
- a reliance on public works instead of private enterprise to grow GDP;
- an aging workforce;
- a shrinking export market;
- capricious and heavy-handed regulation.
President Xi Jinping has tightened his personal control over the economy. Therefore, the country will not undertake necessary structural reforms until Xi is jolted into doing so. He already is confronting growing pressure to do so. If GDP remains below 5 percent next year, as expected, he will begin to take those steps.
DEFLATION RETURNS TO CHINA
After rising in August and September, consumer prices in China resumed falling in October, returning the economy to deflation that it experienced earlier this year, as we reported in “China’s Economy Stagnating,” (20 Jun 2023).
A suite of stimulus measures rushed into place by Beijing earlier this fall did not come in time to prevent prices from sagging again.
The government has cut mortgage interest rates and eased criteria for home purchases. It also announced a wider-ranging stimulus plan valued at about $137 billion. (See “China Shifts Strategy, Announces Stimulus Spending,” 31 Oct 2023).
Analysts have said the measures are not enough to spark the creation of China’s long-sought robust consumer economy, The Wall Street Journal noted.
Consumer prices fell 0.2 percent for the month, the National Bureau of Statistics reported, led by a 30-percent plunge in pork prices as China’s pig farmers expanded their herds over the past year. Food prices overall fell 4 percent.
The price slump was the second monthly slippage since July.
The government had set a target of a 3-percent increase in retail prices for 2023.
Excluding food costs, China’s other consumer prices rose 0.6 percent last month, year on year.
Deflation is a danger to a country’s economy; businesses receive less revenue but their debts and interest rates remain the same. The condition reflects weak demand and an oversupply of goods.
China’s current deflation is caused, in large measure, by its continuing real estate crisis, the WSJ said. Home ownership represents 60 to 80 percent of the typical household’s assets. Falling home prices have left many Chinese reluctant to spend on more than necessities.
The crisis has cut an average of 18 percent in home values in 100 Chinese cities since August 2021, China-based data service Beike Research Institute reported.
China’s three years of drastic anti-COVID lockdowns also have left people reluctant to spend, the WSJ added. During 2022, they learned that lockdowns and layoffs can happen at any time without notice, cutting off incomes.
Deflation is likely to remain for the foreseeable future, some analysts have said, because China now sits with excess manufacturing capacity as companies and countries reshore or “friendshore” their supply lines in the post-COVID economy amid heightened tensions between China and the West.
Producer prices dropped 2.6 percent in October, year on year, marking the 13th consecutive month of declines.
Exports also declined in October, the sixth straight month of decreased shipments.
TREND FORECAST: Producer prices are the basis for future retail prices. Their continuing decline presages more deflation ahead.
As we have noted several times previously, China’s “dual circulation” economic strategy that envisioned a robust consumer economy and thriving export manufacturing sector has failed on both counts.
China’s export manufacturing industry has been reduced not only by the slowed global economy but also by a massive reconfiguration of supply lines spurred by COVID-era shortages and shipping delays as well by geopolitical tensions.
Also, Vietnam and other Asian manufacturing centers have risen to challenge China’s dominance in exports.
Therefore, China’s future economic strength will depend heavily on creating that robust consumer economy that, so far, has proven elusive.
A strong domestic economy will not blossom until the real estate crisis and surprise lockdowns are long past, consumer confidence has been revived, and structural reforms have been undertaken to deal with record youth unemployment, inefficient state-owned businesses, and heavy-handed government interference in various sectors.
CHINA’S STOCK MARKETS DISAPPOINT INVESTORS
After China ended its three years of drastic anti-COVID restrictions late last year, investors flooded the country’s equity markets with cash, expecting China’s consumers to unleash three years of pent-up spending.
That failed to happen.
Instead, Chinese consumers have held to their traditional cultural emphasis on thrift. The sudden, rolling anti-COVID lockdowns that marked 2022 taught many consumers to save their money against unexpected government edicts.
The global economy remains sluggish amid high inflation and rising interest rates. The world’s consumers bought their fill of Chinese goods during the two-year COVID War lockdown and have since shifted their spending to services and travel.
Also, relations between China and the West have become even more testy, casting a dark cloud of uncertainty over trade and other issues.
“Reopening has been disappointing for everyone,” Rob Haworth, U.S. Bank’s senior strategist, told The Wall Street Journal. “There wasn’t much pent-up demand in anything other than domestic travel.”
As a result, foreign investors have yanked a net $1.6 billion out of Chinese stocks and exchange-traded funds so far this year, data service Refinitiv Lipper reported.
The share price of Yum China, which operates KFC and Pizza Hut restaurants there, dove 15 percent on 8 November after the company posted soft sales in September and October. Estée Lauder’s stock also slid when the company said luxury sales in China gouged its revenue and earnings per share. (See “Estée Lauder Share Price Crashes After Company Slashes Earnings Projection,” 7 Nov 2023).
Apple’s revenue in China slipped 2.1 percent in this year’s second quarter, the company reported, after Chinese government officials were forbidden to use iPhones and told to switch to domestic smartphone brands.
Beijing has begun implementing a range of stimulus measures that could bring some new life to the economy, but investors remain skeptical that those will be enough to turn markets around.
“You’d just be pulling future economic growth forward,” Tony Roth, Wilmington Trust’s chief investment officer, said to the WSJ.
GLOBAL FACTORS WEIGH AGAINST CHINA’S FUTURE GROWTH
China’s slumping manufacturing sector and chronically weak consumer economy are not the only factors that will hamper the country’s future growth, the Financial Times reported, citing an analysis by Michael Pettis, a senior fellow with the Carnegie China program.
The world’s GDP is made up of about 76 percent consumption and 24 percent investment, according to Pettis. Even in economies that invest the most, that factor almost never tops 33 percent.
China is the exception. Investment accounted for 43 percent of GDP in 2022 and an average of 40 percent over the last 30 years, according to Pettis.
Consumption is its weak spot: thrift, not spending, is embedded in the country’s culture and consumer spending makes up only 54 percent of the country’s economy, with the trade surplus adding a few percent.
In a global context, China contributes 18 percent of the world’s GDP but tallies only 13 percent of consumption and a whopping 32 percent of the world’s investments.
That, Pettis says, is not sustainable
If China maintains its current modest annual growth of 4 to 5 percent annually for the next 10 years while continuing to rely as much on investment, its share of the world’s GDP will grow to 21 percent and demand 37 percent of global investment.
To meet China’s needs, every other country would have to cut its own domestic investment by a full percent point a year, Pettis calculated.
However, Europe, India, and the U.S. already are enacting plans to increase domestic investments in their economies.
So, in order to maintain 4-to-5-percent annual growth, China would have to switch from a reliance on investment to a greater emphasis on production.
In 2021, the country began to dial back its massive campaign of building roads, rail lines, and “apartment cities” and shift more of its domestic capital to manufacturing.
The problem: for that shift to produce an economic return, China would have to manufacture and sell more goods than the world currently is buying, an even less likely prospect now that companies and countries are reshoring and “friendshoring” their supply chains.
Pettis assumes that China’s consumption economy will grow only slightly. In that case, in order to absorb enough of China’s factory output for the country to grow at that 4 to 5 percent annually, the rest of the world would have to cut factory production by at least half a percentage point, Pettis contends.
“Many more years of high growth in China are possible only if the country were to implement a major restructuring of its economy in which a much greater role for domestic consumption replaces its over-reliance on investment and manufacturing,” Pettis concluded.
INVESTMENT BANKING BUSINESS DRIES UP IN CHINA
Investment banks collected billions of dollars in fees this century as they advised and guided Chinese companies with bond sales, stock offerings, and transnational acquisitions and other deals. Goldman Sachs, HSBC, and other iconic Western banks opened offices in China to be closer to the action.
China seemed to be a money machine and investment banks were among its chief ambassadors to the world of finance.
Those were the good times.
This year, Chinese businesses have issued no high-yield bonds. Hong Kong’s Hang Seng stock market, once a hotbed of new issues, has gone cold; it has lost 10 percent of its value this year, marking its fourth consecutive year in a slump.
As poor as 2022 was for investment banking fees, this year is worse, The Wall Street Journal said.
Foreign investors have turned their backs on China as the country struggles with its lingering property crisis, whimsical government regulations, a snoozing consumer economy, and poor relations with the West. A post-lockdown growth spurt at the beginning of this year fizzled as quickly as it began.
Also, high interest rates in the U.S. have lured assets away from riskier places to put money, a category that now includes China, in the view of many asset managers.
Citigroup, Goldman Sachs, and Morgan Stanley are among Western banking firms that have each laid off dozens of investment bankers as deals have dried up.
”Some of the reasons for China’s deal slump are cyclical but some are likely permanent,” the WSJ noted.
“The China situation isn’t going to get better very quickly,” Kevin Kwek, a partner at consulting firm Kearney, told the WSJ. Banks are looking toward other locations in Asia as new growth engines, he said.
TREND FORECAST: The same structural issues that are hobbling China’s economic growth are the same ones keeping foreign investors away:
- a consumer culture that values thrift instead of spending;
- an oversupply of manufacturing capacity;
- a reliance on public works instead of private enterprise to grow GDP;
- an aging workforce;
- a shrinking export market;
- capricious and heavy-handed regulation.
When progress has been made on those issues, foreign investors will return to China when they find niche opportunities. It is not until the country’s consumer economy emerges strongly that investors will see broad opportunities in China again.