China’s Failing Growth

Feature Stories | May 24 2023

There were great expectations of a rapid Chinese economic rebound, but as some analysts warn, it’s just not going to happen.

-Chinese data disappoint
-Confidence waning
-Property downturn
-Working population shrinking

By Greg Peel

“Something is rotten in the Chinese economy, but don’t expect Wall Street analysts to tell you about it,” wrote Ruchir Sharma, Chair of Rockefeller International, last week. “There has never been a bigger disconnect, in my experience, between some of the rosier investment bank views on China and the dim reality on the ground”.

When Beijing suddenly, and unexpectedly, about-faced on its previously stubborn zero-covid policy early this year, analysts heralded a reopening rebound for the Chinese economy. And indeed, Chinese retail sales leapt 18.4% in April year-on-year, industrial production rose 5.6%, and fixed asset investment rose 4.7% year to date.

Which seem to corroborate reopening boom expectations, but in reality the opposite is true.

April data were anticipated to be significantly strong, as year-on-year the numbers were cycling China’s lockdowns of a year ago when the economy was all but shut. But economists had forecast 21.0% retail sales growth, 10.9% industrial production growth and 5.5% for fixed asset investment. The results, therefore, fell well short.

DBS’ senior economist Nathan Chow noted that on a month-on-month basis, China’s industrial production declined by -0.5% in April. Monthly automobile sales also declined as consumers adopted a cautious stance while automakers reduced prices.

While high-frequency data showed spending surged during the Golden Week holiday, it likely represents pent-up demand rather than sustainable consumption growth, Chow asserts. Consumers have probably already taken most "revenge travel" trips, evidenced by the cooling services purchasing managers’ index (PMI).

Modest 3.8% real income growth -- below pre-covid’s 6.7% -- indicates households lack the purchasing power for persistently higher spending. This is reflected in the benign core inflation of 0.6-0.7% over the past three months. Both Beijing’s and the independent Caixin manufacturing PMIs slipping below the expansion threshold in April illustrated the manufacturing sector is in no position to pick up the growth baton from consumption.

Plunging new loans in April pointed to deeper challenges, Chow warns. The slowdown in medium to long term corporate loans suggests private investment is unlikely to rebound swiftly. Declining mortgage lending despite supportive measures shows profound difficulties for the property sector. Externally, persisting strains in the banking sector and higher interest rates in the US and Europe are expected to pose lingering pressure on China’s exports.

Lacking Confidence

Reopening set a good stage for China to grow the economy this year, notes Citi. In Citi’s 2023 outlook, analysts assumed confidence would improve along with data akin to usual cycles, generating a broad-based and organic recovery of the Chinese economy. This hope now seems misplaced, Citi admits, with confidence revival lagging significantly within the recovery.

With the initial reopening impulse set to fade, weak confidence could become entrenched and self-fulfilling. Citi warns this could be the number one downside risk to the Chinese economy now.

There seems to be a persistent lack of confidence among consumers, homebuyers, corporates and investors, Citi notes. Some common factors could be responsible, such as the scarring effect from economic downturns, zero-covid and its exit, and policy excesses in the past few years, and the sectors could still be re-anchoring long-term expectations. Weak expectations could be reinforcing each other and become entrenched and self-fulfilling.

With weak confidence the major threat now, decisive policy actions are much needed to break the vicious cycle. All the sectors could be waiting for the government to make the first move. After the wait-and-see, cyclical macro policy tools such as rate cuts and targeted fiscal easing are back on the table, in Citi’s view.