Official figures indicate that there is still a ways to go before the economy is back on its feet and that the rapid recovery that China and the rest of the world were expecting has not yet materialized.
Consumer prices in China decreased for the first time in two years in July, dropping 0.3 percent, only slightly more than median predictions of 0.4 percent, according to data released on Wednesday by the National Bureau of Statistics.
The Federal Reserve, which has been pursuing a restrictive monetary policy for 18 months in an effort to halt price increases, now faces the opposite issue as the People’s Bank of China. Given its enormous debt load, China is particularly vulnerable to deflation, the tendency of declining prices across the board.
According to David Dollar, a senior scholar at the Brookings Institute’s China Center, deflation means that debt is becoming more valuable in real terms. Although we are aware that excessive inflation is undesirable, over time it aids in debt management. Inflation has the opposite effect.
According to Bloomberg, the total debt held by individuals, businesses, and governments is around 282 percent of GDP.
The most recent statistics raise questions about the economic outlook for the remainder of the year, and JPMorgan strategists cautioned that China risks “Japanization” a la the 1990s if officials don’t handle the property market, financial imbalances, and aging populations.
The Financial Times reports that Beijing officials have reportedly advised specialists not to display the data adversely and have instructed economists to “interpret bad news in a positive light.”
The math makes this challenging:
China’s exports have decreased by 5% so far this year, while imports have decreased by 7.6%.
Manufacturing has fallen for four consecutive months.
July saw a 14.5 percent loss in exports, the worst drop in three years.
Prior to the epidemic, Dollar noted, “China had growth of about 6%, and it is now struggling to recover.” “After the pandemic shutdown, consumption has not fully returned. Consumption, investment, and net exports, the three primary demand-side elements of GDP, are currently all experiencing significant difficulties.
The United States is leading a growing exodus of China’s former commercial partners in the West. China’s exports are no longer in high demand globally, notwithstanding Russia’s increased commerce with Asia as a result of its conflict in Ukraine. Chinese exports to the United States dropped 23.7 percent in June, hitting a six-month low of $42.7 billion, according to the U.S. Census Bureau.
The tendency toward nearshoring has accelerated since the outbreak. For instance, Mexico has replaced China as the United States’ top trading partner, generating $263 billion in bilateral commerce in the first four months of the year.
According to him, the country is now less appealing to foreign investors due to the presence of Communist Party members in businesses and the preference shown to state-owned businesses. These factors have all hindered domestic output.
According to Roberts, “many businesses now believe that China is not the market of the future.”
Because of this, the amount of foreign investments made in China in the second quarter hit a 25-year low.
a weak housing market
China avoided deflation during the global financial crisis in 2009 and 2012, but the present real estate market is making it harder for officials to win the battle.
Despite recent price drops, property values have increased significantly since 2009, suggesting that the fiscal stimulus may not be having the same impact as it once did. Due to excessive building permits given to developers in China, a surplus of inventory has now rendered large developers helpless.
Country Garden Holdings, formerly China’s top-selling developer, missed several million-dollar coupon payments last week and anticipates suffering significant losses in the first half of the year. Similar to this, Chinese real estate giant Evergrande, which made news in 2021 due to a significant financial default, announced in July a two-year loss of $81 billion.
One-fifth of China’s economy is made up of the real estate sector, which faces challenges including excessive debt levels and insufficient demand from purchasers. In accordance with a Beike research
China’s dismal second-quarter GDP, which came in lower than anticipated at 6.3 percent, is explained in part by the downturn.
People aren’t making purchases since property prices are dropping, according to Roberts. Many people’s wealth is entwined with the real estate industry, and when they notice that prices are declining, they opt to preserve money rather than spend it. The Chinese government won’t be able to expand the real estate market without that confidence.
The one-child policy in China has a lengthy tail.
Years of the one-child policy might ruin the Chinese economy for decades to come, even if Beijing managed to manage its other issues.
According to consultancy company Terry, the population decreased in 2022 for the first time since 1961.
Five percent of Chinese people were 65 or older in 1990. According to the Terry Group, that percentage, which is currently 14%, might increase to 30% by the year 2050. By the end of the next decade, China will potentially lose seven million working-age individuals annually, according to their estimates.
Working-age couples already assist their elderly parents, child education expenditures are growing, and economic confidence is poor.
According to analysts, Beijing has to abolish its long-standing household registration system if it wants to have any hope of altering China’s demographic problems. Because it links social benefits to place of birth, the policy, which goes back to the 1950s, makes rural-urban mobility unpleasant and challenging.
A considerable portion of China’s population, around a quarter, is engaged in agriculture.
10 years of difficulty
China has a large list of issues, which predicts that the next ten years will be difficult.
Beijing has a lot to do with if it wants to reclaim the development of earlier decades, from an unstable, debt-ridden real estate market to anti-business policies and demographic issues.
Geopolitical difficulties with the U.S., Russia, and other trading partners are giving President Xi Jinping more trouble, but analysts believe attention should be paid to internal problems.
He anticipates China will grow by 5% in terms of dollars this year, in line with Beijing’s predictions, but without demographic or financial changes, growth may be closer to 3% over the following ten years.