Away from the debate on Xi Jinping getting a third term – as general secretary of the Chinese Communist Party (CCP) and president of the country – in violation of the convention set after the Mao era; China’s economy is in bad shape.
Much of it was expected as the global economy, which buys Chinese products, has been slowing down. China could barely avoid a contraction in the June 2022 quarter. However, it was not expected that Beijing would fail to live up to its promises by such a wide margin.
In its latest report, the World Bank projected China to grow by a mere 2.8% in 2022, that’s half of the 5.5% growth promised by Beijing. Moreover, for the first time in three decades, China’s growth would lag behind the rest of the Asia-Pacific region.
A 24-country estimate by the Breton Woods Institution pegs growth for the Asia Pacific in 2022 at 3.2%, downgraded from 5%. Minus China, the region would grow at 5.3%. In other words, yesterday’s growth engine became today’s drag force.
“Communist China under premier Xi Jinping is wilting fast. The economy, already under pressure so far this year, looks set to get even worse, according to a recent report from London-based consulting firm Capital Economics,” Forbes reported.
“We’ve been warning for years why we thought the consensus for ongoing, robust Chinese economic growth was wrong, and how the economy would be growing at just 2% by the end of this decade,” Neil Shearing, chief economist of Capital Economics said in a September 26 note.
According to him, China is facing a “generational” or structural slowdown. However, he allays fears that it would “sink the global economy”. According to him, China’s role as the “key driver” of global growth is overblown.
Structural slowdown
Interestingly, Capital Economics predicted a major slowdown in the Chinese economy at least two years before the covid outbreak. The pandemic helped consolidate the trend.
“Construction, a key engine of China’s growth and commodity demand, will slow substantially over the next few years, whether or not the economy escapes the current crunch unscathed,” Chief Asia Economist of the outfit, Marks Williams said in September 2021.
The note was published after the Evergrande crisis unfolded in China in mid-2021. The title of his report was precise: “Property crunch will be followed by lasting decline.”
The link between property or real estate and economic growth is simple. Real estate accounts for 10% of the workforce, 25% of total fixed asset investment and 29% of GDP. If real estate is down, everything else is down.
According to The Guardian, as of August 2022, “new home prices in 70 Chinese cities fell by a worse-than-expected 1.3% year on year (according to official figures) and nearly a third of all property loans are classed as bad debts.”
Meanwhile, China’s steel production is down by 5.7% during the first eight months of 2022. China is the world’s largest steel producer. Clearly, the declining global demand is hurting China.
But that’s not all. Monthly data for August show declining retail sales inside China as well and Capital Economics expects further declines in September. Reduced consumer demand (both exports and domestic ales) is telling on corporate profit.
“Industrial profits fell 2.1% in the first eight months of 2022 from a year earlier, after a 1.1% drop logged in January-July, according to data from the National Bureau of Statistics (NBS) released on Tuesday,” Reuters reported on September 27.
With the US Federal Reserve implementing another 75bps rate hike, sacrificing growth opportunities, to tame inflation, and Europe is reeling under high inflation and slow growth; things might get more difficult for China in the days to come.
Neil Shearing anticipates that China may end 2022 without any growth at all.
Limited headroom
So, what is stopping China from taking corrective actions to lift domestic demand?
They are indeed trying. According to Bloomberg, Beijing earmarked a $1 trillion investment in construction. According to Bloomberg (August 17), satellite images confirmed that road construction picked up in July.
But that is not making enough of an impact because the outlay is not sufficient to compensate for the dramatic meltdown in the property sector. And, China cannot go on bigger spending or bail out the property sector as it would risk financial stability.
The dollar has a unique advantage as the currency for global trade. The rate hikes in the US have made the dollar unduly strong vis-à-vis all other currencies. The US Dollar index, a benchmark of its international value, increased by 18% year on year.
As a result, the Chinese Renminbi has already suffered over 11 percent devaluation over the last year. Remember that Beijing puts strict bands for market movement of Renminbi value, meaning the actual value of Chinese currency is unknown.
According to Capital Economics, the central bank of China is battling to prevent the dramatic devaluation of the Renminbi. “An overt weakening of the currency could encourage capital outflows,” which would in turn risk the domestic financial stability.
Not to mention that such risks have increased manifold in the aftermath of the property crisis. To sum up, China is in a bind. Their growth model developed vulnerabilities. The road to recovery may be long.