Analysts are becoming increasingly sceptical that Beijing will reach its 5% economic growth target for 2024. A real estate collapse has made consumers cautious and businesses wary, as China confronts an economic slump. Investment banks are cutting their growth forecasts for China, believing Beijing risks undershooting its official target of 5% as confidence wanes in the world’s second-largest economy. This will have deleterious consequences for Australia, as China remains far and away our largest trading partner.
Last week, Bank of America lowered its forecast from 5.0% to 4.8 per cent; TD Securities cut its forecast from 5.1% to 4.7%. JPMorgan expects growth of 4.6%. Two weeks ago, UBS also reduced its growth forecast. Economists have mounting concerns over the trajectory of China’s economy as policymakers grapple with the prolonged property sector slowdown and weak consumer and investor confidence.
A few years ago, Beijing resolved to wean its economy from its dependence on an overheated real estate market, a sector that had underpinned household savings as well as China’s banking sector and local government finances. Now, the property sector is in crisis. Developers collapsed leaving behind huge debts, a trail of failed investments, unsold apartments and lost jobs.
Chinese consumers, already amongst the world’s biggest savers, have become even more frugal. Businesses that endured the impact of heavy-handed Covid measures have cut salaries and scaled back hiring. Millions of college graduates joining the job market are facing poor prospects, and youth unemployment is somewhere around 17% (depending on whether you believe the Chinese government’s releases). And China’s population has shrunk two years in a row. In a country where the majority of people had only known the economy to grow rapidly and living conditions to improve, confidence is eroding.
Chinese consumers are depressed
Source: Yardeni
The median forecast for full-year gross domestic product growth across economists polled by Bloomberg has slipped from 4.9% a month ago to 4.8% in mid-August. Last year, China grew 5.2%.
For decades, China’s GDP growth easily met the government’s target, which it announces each year. But in the wake of the Covid pandemic, the figure has attracted close scrutiny.
Home prices are falling in China
Source: Yardeni
Weaker than expected second-quarter growth of 4.7% in July set off the forecast cuts. Most lowered their forecasts due to a deeper-than-expected property downturn which has yet to bottom and its impact on household consumption.
Analysts at Citi have pointed to weather shocks and weak demand, highlighting an 8.5% contraction in steel output, widening from 5.3% in July. Since the beginning of the year, iron ore has fallen from USD 140/tonne to less than USD 100/tonne, creating an enormous challenge for Australia’s largest export commodity product.
Chinese stock prices are on downward trends led by real estate stocks
Source: Yardeni
Other factors at work include the risk of escalating trade tensions between China and other economies. More European countries appear to be following the US example of seeking to “near-shore” or “friend-shore” their critical supply lines and strategic sectors. And with the over-blown rhetoric of the US elections getting ever louder, this will get worse before it gets better.
A number of foreign firms that once rushed into China are now retrenching. Last month, the beauty retailer Sephora, an arm of the French luxury group LVMH, announced that it was cutting jobs because of “the challenging market.” IBM is shutting its two research and development centres in China. Foreign Direct Investment (FDI) in China has been falling steadily. China’s Ministry of Commerce in June said in the first five months of this year, the economy attracted $56.8 billion in FDI, a year-on-year decrease of 28%. The level of FDI in China is the lowest in decades.
China missed its 2022 GDP target, expanding just 3% on a target of 5.5% after a series of Covid lockdowns. A series of disappointing data releases this year has spurred calls for more government stimulus. Strategists are calling for a mid-year budget expansion, citing faltering spending, a lack of private investment and pessimism taking hold among domestic companies and major importers.
But there are few easy fixes. Policymakers trying to respond are hindered because they cannot rely on the principal fix that worked in the past. For years, local governments borrowed money for showy development projects that kept people working and the construction sector booming — even if there wasn’t an actual need for that much new infrastructure.
The Chinese 10-year government bond yield has plunged
Source: Yardeni
The decline in the 10-year bond rate is a worrying sign of economic weakness that the administration in Beijing is trying to reverse. Few governments want to pay a higher rate of interest on their borrowings – but China is different. As Robin Harding, the Financial Time’s Asia editor wrote in the Australian Financial Review recently, “China’s bond market is sending a warning signal to the world… Soft yields are a vote of no confidence in government policy, a forecast that economic conditions will not improve and a warning that deflation will take root if nothing is done to stop it.”
