Global Courant
A view of tall buildings along the Suzhou Creek in Shanghai, China on July 5, 2023.
Yingtang | NurPhoto | Getty Images
The Chinese economy could face a prolonged period of lower growth, a prospect that could have global repercussions after 45 years of rapid expansion and globalization.
The Chinese government is stepping up a series of measures to stimulate the economy, with a major Politburo meeting later this week to assess the country’s performance in the first half.
China’s gross domestic product grew 6.3% year on year in the second quarter, Beijing announced Monday, below market expectations for 7.3% growth after the world’s second-largest economy emerged from strict Covid-19 lockdown measures.
Quarter on quarter, economic output grew by 0.8%, slower than the 2.2% quarter on quarter growth in the first three months of the year. Meanwhile, youth unemployment hit a record high of 21.3% in June. On a more positive note, the growth rate of industrial production accelerated from 3.5% year on year in May to 4.4% in June, well above expectations.
The ruling Chinese Communist Party has set a 5% growth target for 2023, lower than normal and remarkably modest for a country that has averaged 9% annual GDP growth since opening its economy in 1978.
Over the past week, authorities announced a series of pledges targeting specific sectors or designed to reassure private and foreign investors about a more favorable investment climate ahead.
However, these were largely broad measures without some major details, and the latest reading of the quarterly meeting of the Politburo on economic affairs was mild, but fell short of major new announcements.
Julian Evans-Pritchard, head of China’s economics at Capital Economics, said in a note Monday that the country’s leadership is “obviously concerned,” with the readout calling the economic trajectory “tortuous” and highlighting the “numerous challenges facing the economy.”
These include domestic demand, financial problems in key sectors such as real estate, and a bleak external environment. Evans-Pritchard noted that the latest reading lists “risks” seven times, up from three times in the April reading, and that the leadership’s priority appears to be to increase domestic demand.
“Overall, the Politburo meeting struck a dovish note and made it clear that the leadership believes more work needs to be done to get the recovery on track. This suggests some further policy support will be rolled out in the coming months,” said Evans-Pritchard.
“But the absence of major announcements or policy details suggests a lack of urgency or that policymakers are struggling to come up with suitable measures to support growth. Either way, it’s not exactly reassuring for the near-term outlook.”
Triple shock
China’s economy continues to suffer from the “triple shock” of Covid-19 and protracted lockdown measures, the ailing real estate sector and a slew of regulatory shifts related to President Xi Jinping’s vision of “common prosperity,” said Rory Green, head of China and Asia research at TS Lombard.
Given that China is still within a year of reopening after zero-Covid measures, much of the current weakness can still be attributed to that cycle, Green suggested, but he added that they could become entrenched without the right policy response.
“There is a chance that if Beijing does not step in, the cyclical part of the Covid cycle damage could tie in with some of the structural headwinds that China has — particularly around the size of the real estate sector, decoupled from the global economy, demographics — and push China to a much, much slower pace of growth,” he told CNBC on Friday.
TS Lombard’s baseline scenario is for China’s economy to stabilize by the end of 2023, but that the economy will enter a longer-term structural slowdown, albeit not yet a Japanese-style “stagflation” scenario, and is likely to average closer to 4% GDP growth per year as a result of these structural headwinds.
While the need for exposure to China will still be essential for global companies as it remains the largest consumer market in the world, Green said the slowdown could make it “slightly less attractive” and accelerate “decoupling” with the West in terms of investment flows and production.
For the global economy, however, the most direct spillover from a Chinese slowdown is likely to be in commodities and the industrial cycle as China reconfigures its economy to become less dependent on a real estate sector that “absorbs and drives up commodity prices”.
“Those days are gone. China is still going to invest a lot, but it’s going to be kind of more advanced manufacturing, tech hardware, like electric vehicles, solar panels, robotics, semiconductors, areas like this,” Green said.
“The driving force behind real estate – and with it that pool of iron ore from Brazil and/or Australia and machinery from Germany or equipment from around the world – is gone, and China will be a much less important factor in the global industrial cycle.”
Second order effects
The recalibration of the economy away from ownership and towards more advanced manufacturing is evident in China’s massive push towards electric vehicles, leading to the country overtaken Japan earlier this year as the world’s largest car exporter.
“This shift from a complementary economy, where Beijing and Berlin more or less benefit from each other, to now being competitors is another big consequence of the structural slowdown,” Green said.
He noted that China’s response to the shifting economic sands, beyond the immediate loss of commodity demand, will also have “second-order consequences” for the global economy.
“China is still making a lot of stuff, and they can’t consume it all at home. A lot of the stuff they’re making now is of much higher quality and will continue to be, especially as less money goes into real estate, and trillions of renminbi go into these advanced technology sectors,” Green said.
“And so the second-order impact, it’s not just less demand for iron ore, it’s also much greater global competition for a range of advanced manufactured goods.”
While it is not yet clear how Chinese households, the private sector and state-owned enterprises will ensure the transition from a model driven by real estate and investment to one driven by advanced manufacturing, Green said the country is currently at a “critical point”.
“Political economy is changing, partly by design, but also partly by the fact that the real estate industry is basically dead or if not dying, so they have to change and a new model of development is emerging,” he said.
“It will not just be a slower version of the China we had before Covid. It will be a new version of the Chinese economy, which will also be slower, but it will be one with new drivers and new kinds of quirks.”
