Chinese economy – Structural headwinds require additional stimulus

Global Perspective

 

July 26, 2023

Executive Summary

The lackluster post-pandemic recovery in China is becoming more visible with economic data continually disappointing estimates.

There is plenty of talk on stimulus, but actual delivery is questionable at best. China faces multi-faceted structural challenges that could keep its economic growth depressed for many years. 

  1. The troubles of the real estate sector are in their early stages, and the future could be full of restructurings, bond defaults, and bankruptcies.
  2. China’s importance in the global economy is undeniable but gaining the same significance in the geopolitical scene may result in China breaking things.
  3. Chinese population dynamics are so dire that the country is expected to lose around 10 million  from its population every year until the end of the century. 

We recommend keeping emerging markets equities underexposed in portfolios until a tangible big-bang-style stimulus arrives in China beyond rhetoric.

What happened

China’s recent macroeconomic data confirmed our worries about its challenging economic recovery.

  • Its second quarter GDP growth rate came in at 0.8%, slower than the first quarter and in line with estimates.
  • Industrial production surprised to the upside at 4.4% year over year.
  • Retail sales disappointed at 3.1% year over year.
  • Property investment is down 7.9%, confirming the severity of the downturn in real estate markets.
  • Unemployment stayed steady at 5.2%. However, youth unemployment rose to record levels.

During last March's National People's Congress, China announced a 5% economic growth target for 2023. Consensus assumes an even higher rate at 5.4%. Based on the current momentum, 5% is achievable if the official data is correct. Still, anything above that is a tough stretch unless Chinese officials unleash a meaningful stimulus or the trade balance, which is already very supportive, improves even further. 

Consumer confidence is weak, with homeowners feeling the brunt of the drop in house prices, dragging down retail sales. Furthermore, average consumer prices are flat, bucking global inflation trends.

While there is plenty of stimulus chatter regularly in the headlines, it has not been accompanied with any real follow-through so far. Officials have refrained from a big-bang-style stimulus like the one deployed during the years of the global financial crisis. 

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