The South China Morning Post is worried about a recession in China.
Fortune magazine speaks of a dead-end for the Chinese economy.
And Bloomberg talks of China’s economic miracle fading.
Chinese consumers lack confidence and the property sector’s problems seem to be intractable.
It seems a far cry from the years when China was growing at a 10% clip and was the focal point of the global economy.
What’s got us to here?
Several policy mis-steps coming out of Covid didn’t help. A staggered re-opening did little for confidence. Attempts to get consumers to buy new durable goods products was ineffective. Interest rate reductions were minor. But above all, government policy seemed content to accept a lower level of growth as many of President Xi’s initiatives were more concerned about concentrating political power.
So what’s the current picture? The economy is probably growing around the 5% mark. Morgan Stanley forecast 4.5% growth for next year. The consumer remains under pressure. The most recent reading on retail sales was for growth of just over 2% – well below what economists had been expecting, and a decline in the rate of growth. Consumers are also facing surges in utility bills. Manufacturing is doing a bit better posting an increase of nearly 7% on the year.
Property problems persist. Major property developers are essentially bankrupt. Home sales values dropped by over 28% per year in the first 4 months of this year. The most recent development on the property front saw local governments allowed to buy up undeveloped land and unsold housing to promote activity in the sector. This will be financed by sale of bonds and some Central bank support. The plan is to help developers reduce inventory and generate some cash. However many local governments are too indebted to procure land. The other concern is that the programme is too small to really move the needle. It will account for only 0.4% of China’s GDP. Local authorities’ total debt load last year was estimated at $23 trillion. $42 billion of lending support from the People’s Bank of China in this new initiative is simply not enough.
Apart from the slower economic numbers, China also continues to present investors with a degree of geo-political risk. Support for Russia in its Ukraine war could have lasting consequences. Relations with the US are marked by escalation of tariffs and the continued tensions in Taiwan. Taiwan’s newly inaugurated president Lai Ching-te has done little to ease such tension, calling on China to accept the existence of it’s democracy.
President Xi’s China seems to be happy to sacrifice economic growth for national security, self-sufficiency and social cohesion. This seems unlikely to change. It has meant that many policies to reboot the economy have been too cautious. Politics shapes policy. For investors this means that a return to growth rates of 10% or more and an unleashed Chinese consumer may remain wishful thinking.
Recently, Investment Week asked if China’s risk premium was unfair, with many investment managers responding that they saw opportunity.
However it is important to evaluate China as it is, rather than as it may have been in the past. Despite growing at close to 5%, this, by its former standards, is a sluggish economy. Average incomes are growing at the slowest rate since the 1980’s. Political risk has also increased – this week’s military exercises by China around Taiwan are a case in point.
For investors, China is not one-way bet anymore, but a much more balanced risk and return proposition.
Tradewinds 