(Bloomberg) -- China’s economic growth target of 5% this year is looking ambitious, given sluggish consumer spending, an uncertain outlook for the country’s exports and a still shaky property market. President Xi Jinping’s government spent recent months trying to fix those problems via a succession of stimulus measures that left investors clamoring for more decisive action. Now the election of Donald Trump as US president, with his threat of steep tariffs on Chinese goods, has cast another shadow over the world’s second-largest economy. The risk is of a deflationary spiral that sends China into a period of protracted, Japan-style malaise after three decades of unprecedented growth.
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How is the downturn playing out?
Before the latest bout of stimulus, the vast majority of global banks were expecting China’s economy to miss this year’s goal. Deflationary pressure was on the rise, with new-home prices falling the most since 2014 and consumer confidence at its lowest in more than a year and a half. The government has continued to lean on manufacturing and exports to drive a recovery. As of the end of September, fewer than a fifth of economists surveyed by Bloomberg were predicting gross domestic product would expand by 5% in 2024. Analysts at lenders such as Bank of America Corp. questioned why fiscal and monetary policy wasn’t doing more to revive domestic demand. While export growth was on the rise, Beijing faced a pushback from countries worried over the impact of cheap goods from the world’s biggest manufacturing nation. Top officials like Vice Finance Minister Liao Min have defended China’s industrial prowess, saying the country’s manufactured products provide good value for money and can help contain inflation on a global scale.
What were China’s latest stimulus measures?
After long appearing reluctant to take more aggressive measures, the Politburo — consisting of the Communist Party’s most senior 24 officials including Xi — vowed at a September meeting to pursue China’s annual economic goals and arrest declines in the property market. The policy moves that followed represented the country’s boldest stimulus blitz since the pandemic. By mid-November, they had brought some relief to the economy, without significantly bolstering consumption.
- A major focus of the latest policy push is stabilizing the real estate sector, with measures such as a cut to rates on outstanding mortgages and looser curbs on the housing market.
- Acting in coordination with the central bank, the authorities cut interest rates, unlocked liquidity to encourage bank lending and pledged as much as $340 billion to boost China’s equity market.
- Officials then unveiled a $1.4 trillion refinancing plan to shift some hidden liabilities of local governments onto public balance sheets, in what Finance Minister Lan Fo’an called “a major policy decision.” Local governments do much of the spending in China’s economy, and their financial woes have been a big drag on consumption. Morgan Stanley economists have said resolving the local debt problems was a “critical” step in breaking a deflationary spiral.
Why is China’s downturn a problem for the rest of the world?
A lot of the world’s jobs and production depend on China. The IMF forecasts China will remain the top contributor to global growth through 2028, with a share expected to represent 22.6% — double that of the US. Mineral-exporting countries such as Brazil and Australia are particularly sensitive to the ups and downs of Chinese infrastructure and property investment. For example, the domestic downturn left too much steel for the local economy to absorb, pushing up exports of the metal, which contributed to lower prices globally and plunged companies in countries such as Chile into distress. Weak demand in China is also hurting the profits of automakers ranging from Stellantis NV to Aston Martin. Meanwhile, increasingly frugal Chinese consumers have sent sales diving for global brands like Starbucks Corp. and Estée Lauder Cos.
Where is the trouble?
China’s $18 trillion economy has been struggling across a range of sectors. Manufacturing activity, as of October, has been in contraction since April 2023, bar four months. Exacerbating the outlook are US efforts to cut China off from supplies of advanced semiconductors and other technologies set to drive future economic growth — an approach that officials in Washington call “strategic competition” and China decries as “containment.” Confidence at home became so fragile that China’s bank loans to the real economy shrank this summer for the first time in 19 years. The balance sheets of cash-strapped local governments are among the casualties of slumping property prices. Their revenue from land sales has been declining at a record rate, making it harder to reverse a drop in budget expenditure just when the economy is in dire need of fiscal support.
What’s happened to Chinese consumer demand?
Optimism was high as China exited pandemic curbs in late 2022 and reopened its borders that the nation would see a rapid recovery in consumer spending fueled by “revenge shopping,” eating out and travel. That boost failed to materialize as people fretted about what weak growth means for unemployment and incomes. The years-long real estate crisis also wiped out an estimated $18 trillion in wealth from households, prompting people to save rather than spend and pushing China into its longest streak of deflation since 1999. Chinese tourists shelled out less money during their long holiday that ended in early October compared to figures from before the pandemic. Per-trip expenditure dropped 2.1% from five years earlier, according to Bloomberg calculations based on tourism ministry figures, in one of the first snapshots of how the measures announced by the government before the so called Golden Week break fed through to consumer confidence. Unemployment remains a concern, made worse by a regulatory crackdown on big technology companies that’s deprived many young, ambitious graduates of a lucrative career path. The youth jobless rate rose in August for the second straight month to its highest level this year.
What’s going on with property?
Real estate has been the main engine of China’s economic growth since President Xi Jinping came to office a decade ago. The government attempted to crack down on heavily indebted developers in 2020 to reduce risks to the financial system. That pushed house prices down and many weaker companies defaulted. A lot of developers stopped building homes they had already sold but hadn’t yet finished, prompting some people to stop paying back loans they had taken to finance them. This turbulence was a wakeup call for many Chinese, who have long considered property a sure-bet investment and used it as a store of wealth. The pain continued into 2024, extending a trend of declines in place since early 2022. In May, China unveiled its most far-reaching attempt to revive the property market. But progress has been slow on plans that include a program to provide 300 billion yuan of central bank funding to help government-backed firms buy unsold homes from developers. And given the unattractive economics of the plan for local authorities, only a fraction of more than 200 cities urged to participate by the central government are heeding the call to help absorb an excess of housing.
Will the latest stimulus effort fix the problem?
The stimulus package may lift growth enough to put China close to delivering the 5% growth goal. But overcoming deflation and reversing the gloom around property will be a tall order. Plus, an escalating series of trade disputes has the potential to cut into growth. Economists at Standard Chartered Plc and Macquarie Group Ltd. project China’s growth would suffer a hit of as much as two percentage points should Trump follow through on his campaign vow to raise tariffs on Chinese goods to 60%. And the massive oversupply of housing means it will take a while for any property stimulus to flow through to actual construction, if it does at all. With a shrinking population and slowing urbanization, there are relatively fewer structural factors driving housing demand. As a result, the country could face an extended period of weak growth while it works out its debt problems, just as Japan did in its so-called lost decade, after the property and stock market bubbles there burst.
What do investors want?
The euphoria that initially greeted China’s recent stimulus measures proved fragile as investors looked for greater fiscal spending and debt issuance to arrest the slowdown and ensure other easing measures pack a real punch. In a nod to the concerns, Premier Li Qiang vowed in October to “listen to the voice of the market” when formulating economic policies. The promises and letdowns have whipsawed assets, with Hong Kong-listed Chinese stocks surging more than 30% in a matter of days, before suffering their worst session since 2008. For some analysts, a turning point has already arrived. In mid-October, Goldman Sachs Group Inc. upgraded its forecasts for China’s growth in 2024 and 2025, though it still sees it slightly below 5% for both years, while warning that structural challenges such as deteriorating demographics could hold back the economy over the long haul. Beijing may yet deliver a bigger fiscal punch once it has a clearer idea of what Trump has in store for China. The prospect of an expanded trade war during the US president-elect’s second term means the onus will increasingly lie on fiscal policy to offset the shock to external demand.
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