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| China's economy is disappointing in the first 6 months of 2023. (Source: Monexsecurities) |
Analysts had predicted that 2023 would bring China a glorious stock market recovery.
Bank of America's forecast also argues that while the recession will affect the rest of the world , China will be a "notable exception." The bank expects China's growth to hit a 17-year high this year.
The growth "miracle" is over?
However, in the first half of 2023, the Chinese economy has disappointed. Industrial production and trade have slowed markedly. Debt is everywhere, especially in the real estate development sector - a sector that accounts for 30% of the economy. The private sector - which was expected to drive much of China's recovery - is also shaking.
In particular, the mechanisms that fueled the “Chinese miracle”—a three-decade transformation that made the country a global sensation—have broken down.
Take demographics, for example. China’s working-age population is aging and youth unemployment is at a record high. Official data show that about 20.4% of 16- to 24-year-olds were unemployed in April 2023. That’s the highest level since official data began in 2018.
Meanwhile, the bubble in China’s real estate market has burst. And given the central role of real estate in the economy, this painful process could continue to drain money from households, banks and local government networks.
In addition, major investors are abandoning the once-promising country in droves. The Chinese government ’s tightening grip on private enterprises has discouraged businesses from taking risks, while deteriorating relations with the West have also dampened foreign investment.
Data shows that foreign direct investment (FDI) into China fell 48% in 2022 to just $180 billion, while FDI as a share of GDP also fell to less than 2%, from more than double the level 10 years ago.
In addition, competition to attract investment capital with neighboring countries such as India and Vietnam is getting hotter as international companies seek to diversify their supply chains to minimize risks.
“Investors have looked elsewhere in the region for opportunities amid China’s economic weakness,” Andrew Tilton, chief Asia-Pacific economist at Goldman Sachs, said in a research note. “Investor sentiment towards China has weakened further, and in our view is at a low we have only seen a few times in the past decade.”
Linette Lopez, a senior reporter for Insider , also found that trade is very important to China right now. Now is the ideal time to boost exports and attract capital from the world.
But geopolitical tensions have prompted the US, China’s largest trading partner, to “de-risk” the country. Many US corporations are looking to move operations elsewhere. Last year, China accounted for 50.7% of US imports from Asia, down from more than 70% in 2013, according to management consulting firm Kearney.
China's economy may be reopening, but it's not necessarily back to work, according to Leland Miller, founder of China Beige Book.
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| The world's second largest economy will accept slower growth. (Source: VCG) |
Choose low growth to reduce debt
At the core of China's problem is debt. For years, the country's growth has come from infrastructure and real estate development.
But the Wall Street Journal says the world's second-largest economy has relied on debt to fund everything from giant bridges to new apartment buildings.
Data from the Bank for International Settlements (BIS) shows that as of September 2022, total outstanding credit extended to China's non-financial sector was $49.9 trillion, more than three times higher than 10 years ago.
In addition, total debt in China compared to Gross Domestic Product (GDP) reached 295% in September last year, exceeding the 257% in the US and the average of 258% in countries in the Eurozone.
To pay off debt, Chinese consumers are hoarding cash, with many refusing to borrow money from banks to invest.
Private businesses are also making virtually no new investment, despite Beijing’s efforts to encourage corporate spending. Local governments are also cutting spending on everything from roads to worker wages in an effort to keep debt under control.
Companies and local governments that previously borrowed are now focused on repaying their debts, so they are less likely to pump money into new projects, which will boost GDP growth, said Nicholas Borst, director of China research at Seafarer Capital Partners.
However, it appears the world’s second-largest economy will accept slower growth. In a government work report delivered by Premier Li Keqiang on March 5, China set an economic growth target of around 5% in 2023, one of the lowest levels in decades.
“China’s policy will continue to be to reduce debt wherever possible, even if it means slowing growth,” said Arthur Kroeber, founding partner of research consultancy Gavekal Dragonomics.
China's core growth rate could fall to 2-4% in the next decade, from 6.2% in the past decade, he estimated.
“As investors turn their attention to short-term improvements in the pandemic, they will begin to see that, in the longer term, China’s economy has completed its transition from strong, rapid growth to slow, sustained growth,” said reporter Linette Lopez.
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