Is China’s Golden Era Over?

When the global economy is again drifting towards a recessionary phase, it is fast losing its confidence in one of its engines of recovery of yesteryears, i.e., China which itself is passing through a slack season.

According to the International Monetary Fund’s (IMF) Managing Director Kristalina Georgieva, global economic growth is projected to dip below 3% in 2023 and to remain at around 3% for the next five years. That is the global lender’s lowest medium-term growth forecast since 1990, and well below the average growth of 3.8% seen in the past two decades. But this time, quite unlike in past, there are only few growth engines which could help economic recovery or stop further slide, and China is the least probable one because its own economy is not showing good omens.

It was conjectured after the post Covid-19 economic recovery started picking up across the world that Chinese economy could generate the required push for this economic recovery. Many observers believed that a strong rebound from China would help offset an expected slowdown in other parts of the world, spurred by monetary tightening policies by central banks over the past 12-18 months.
In the past, China’s huge stimulus after the 2008/09 financial crisis helped the global economy recover, partly due to the Asian country’s insatiable appetite for imported raw materials for infrastructure projects. But these expectations have started fading as China’s economic growth story is not in as good a shape to help global economic recovery.

Although the IMF in its latest projection has still predicted that China will continue to be the largest driver of global economic growth over the next five years, contributing some 22.6% of total world growth, compared with just 11.3% for the United States, China’s recent growth data is not reassuring. China’s muted economic rebound, and Beijing’s reluctance to deploy large-scale stimulus, are reverberating around the globe, crushing commodity prices and weakening equity markets. Investors are pegging back their expectations for the world’s second-biggest economy as worries mount that its recovery from pandemic restrictions has lost momentum.

Recent data suggest the economy is rebounding after disruptions caused by the sudden lifting of Covid-19 curbs in December, led by consumption, services and infrastructure, but easing inflation and surging bank savings are raising questions over the strength of domestic demand. China’s economy expanded
4.5 percent year on year in the first quarter of 2023, marking the highest growth since the first quarter of last year. However, According to data released by the National Bureau of Statistics, China’s GDP grew 2.2% in January-March quarter 2023 on a quarter-by-quarter basis. The government has set a modest target for economic growth of around 5% for this year, after badly missing the 2022 goal. The quarterly growth 2.20% in the first quarter of 2023 is viewed as positive by many as compared to 0.60% last quarter and 1.30% last year.

But all is not well with the Chinese economy and its capacity to bolster the global economic growth is waning fast. Reuters reported that China’s April industrial output and retail sales growth undershot forecasts, suggesting the economy lost momentum at the beginning of the second quarter. The industrial output grew only at a rate of 5.6% in April from a year earlier, accelerating from the 3.9% pace seen in March, but well below expectations for a 10.9% increase. Although, retail sales, a gauge of consumption, jumped by 18.4%, up sharply from a 10.6% increase in March and fastest growth since March 2021, this was also well below expected 21.0% growth.

The Nikkei Asia report says that the Chinese economy has bounced back from the shock of December quarter in 2022, but now the recovery of the Chinese economy has lost steam. According to its report, the sale of new homes in China witnessed a decline of 11.8 per cent on the year in April, which shows a steeper drop than the 3.5 per cent in March. The fall in sales has dealt a blow to provincial governments, which generate a large portion of revenue from selling land-use rights to developers.
The report has pointed out that China is also facing protracted disinflation or slowing price growth. Its consumer price index witnessed a rise of 0.1 per cent on the year in April and is on the verge of negative growth. Unemployment among those aged between 16-24 topped the 20 per cent mark as graduating university students struggle to find jobs. Weak economic fundamentals are affecting long-term interest rates. The 10-year government bond yield on May 16 was at 2.69 per cent, witnessing the lowest point since November. It is approaching the 2.35 per cent logged in June 2022, the lowest figure in recent times. The China Foreign Exchange Committee discussed curbing exchange rate volatility recently, but the Yuan continued to weaken.

A slowing economic recovery, deflation fears and risk-averse foreign investors have been affecting China’s financial markets, reducing both stock prices and the Yuan’s value. According to Chaohui Guo, an analyst at investment bank China International Capital Corp, “People are adjusting their China recovery
expectations lower.” In equity markets, the CSI 300 Index has given up about half its gains from the so-called reopening trade that started in November, while the Yuan is signaling an economy in distress after breaking through the closely-watched 7-per-dollar level. Chinese authorities have been using monetary stimulus to try to rev up the economy. However, the risks have driven the Yuan even lower.
Such uncertainties have led the US and other foreign investors to avoid Chinese stocks. The tensions between the US and China over Taiwan and tech company regulation and the risk of economic sanctions contribute to the trend. Stocks like Alibaba Group Holding and Tencent Holdings have also suffered. US investment in Chinese stocks could reduce even further as recent Chinese restrictions on US chip company Micron Technology sparked fears of escalating tensions.

After key economic indicators for April undershot market expectations, Goldman Sachs hinted at the risk of a reduction to its growth projection for China in the April-June quarter from the current 4.9 per cent. Although, Goldman maintained the 6 per cent full-year forecast, it has warned that the slump could continue if confidence in the economy continued to be undermined and there are many factors that are undermining confidence in the Chinese economy.

In a recent interview Steve Tsang, director of the China Institute at the London-based School of Oriental and African Studies rightly remarked, “China’s economy is not about to implode but it is not roaring back to the golden decade of the 2010s when it grew at a double-digit level.” He added in the crisis-ridden property market, sales are slowing after an initial rebound. Combined with the persistent financial troubles of real estate developers, that’s hampering new projects in a sector which accounts for about 20% of China’s GDP after including related sectors. Infrastructure spending is being constrained by the hefty debt loads of local governments. Chinese economy is also reaping the tune of past policy over-activism. The past stimulus measures have left China mired in a mountain of debt. In March, the International Monetary Fund warned that Chinese local government debt alone has risen to a record 66 trillion Yuan, equivalent to half the country’s GDP.

Tang noted, “The assertive foreign policy that Chinese President Xi Jinping has imposed caused the US and other Western countries to start to decouple or de-risk in their economic links with China, meaning that a key factor that had previously supported rapid growth in China is weakening.” Tit-for-tat tariffs led
to US sanctions on several Chinese companies and officials. Washington has even restricted China’s access to its semiconductor and artificial intelligence (AI) technology on national security grounds.

Tang further adds that China’s threat to invade Taiwan, which Beijing claims as its own island, continues to antagonize the West. Beijing’s friendly ties with Moscow and neutrality over Russia’s invasion of Ukraine are other contentious issues that have put global economic collaboration at risk.

In view of all these factors, Tang warned that those Western policymakers praying for China to revive their economies now will need to “look at the new political and economic realities without tainted glasses.” The times are changing and Chinese economy alone could not rescue the world from an impending recession. The need of the hour is that the world starts looking up and increasingly collaborates with other emerging economies of the world for improving the growth prospects of the world. For instance, India, a leading emerging economy remains a “bright spot” in the world economy, with the country expected to contribute a significant 15 per cent of the global growth in 2023 and its market has still huge potential to be tapped. According to IMF’s latest World Economic Outlook report, India is the fastest-growing economy in the world which will grow by 5.9 per cent in the current fiscal year.

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