From Great Wall to Great Fall? China's Economic Woes

Restaurants have been riding a wave of prosperity since China's COVID-19 controls were lifted, while the gods of wealth have turned a blind eye to the rest of the economy. GDP figures on July 17, 2023, unmasked the harsh reality that the country's economic fortunes were not as bountiful as the thriving restaurant trade would suggest.

Janet Yellen's visit to Beijing may have provided a boost to the local restaurant trade with her team dining at a popular establishment known for Yunnanese dishes. The restaurant even honored her with a specially curated "God of Wealth" menu, highlighting her influential position as the U.S. Treasury Secretary. During her stay, Yellen also took the opportunity to engage with female entrepreneurs and economists, hosting a lunch with them. Such interactions and engagements between high-level officials from different nations can foster economic cooperation and provide opportunities for collaboration between countries. However, despite the success observed in the restaurant industry since China dropped its COVID-19 controls in 2022, the overall economic landscape of the country has faced challenges. The GDP figures released on July 17, 2023, revealed signs of economic trouble in China.

China’s GDP figures showed that the country’s economy experienced a 6.3% growth in the second quarter of the current year compared to the same period in the previous year. While this growth rate may seem impressive, it fell short of expectations. It's important to note that this figure was partly influenced by a low base in 2022, which occurred due to lockdowns in major cities like Shanghai last year. When compared to the first quarter of the current year, the growth rate was only 0.8%, which translates to an annualized rate of merely 3.2%. This suggests that the economy's pace of expansion slowed down considerably between the first and second quarters of the year.

It is crucial to consider both the year-on-year and quarter-on-quarter growth rates to gain a comprehensive understanding of the economic performance, as different factors and events can influence these figures. The slowdown in growth between the two quarters could be an important trend to monitor to assess the overall health and trajectory of the Chinese economy.

Obstacles to growth were both foreign and domestic. The dollar value of China's exports, for example, experienced a significant decline of more than 12% in June compared with the same month a year earlier. This drop marked the sharpest decrease since the height of the pandemic in February 2020. This decline in exports can be attributed to the sluggish recovery of the world economy, affecting global demand for Chinese goods.

Furthermore, the recovery of China's property market faced challenges as well. Sales of flats plummeted by 27% in June compared to the previous year. This drop indicates a slowdown in the property market, and current sales levels are now significantly below what economists believe would be justified by the underlying demand, considering China's urbanization trends and the widespread desire for better accommodation.

These economic indicators collectively point to a more complex and challenging economic landscape for China. While the country experienced some growth in the second quarter, it fell short of expectations, and various factors both at home and abroad may continue to influence its economic trajectory moving forward.

The weaker-than-expected economic growth in China is further highlighted by its "nominal" growth, which refers to growth figures before adjusting for inflation. Surprisingly, the nominal growth was even weaker than the inflation-adjusted figure, and this has occurred only four times in the past 40 quarters. This suggests that the price of Chinese goods and services is experiencing a decline. In fact, calculations indicate that they fell by 1.4% in the year leading up to the second quarter. Such a significant drop would mark the sharpest decline since the global financial crisis.

This situation of falling prices may raise concerns as it could potentially lead to deflationary pressures in the economy. Deflation can have adverse effects on consumption and investment behavior, as consumers and businesses may delay purchases in anticipation of even lower prices in the future, impacting overall economic activity.

The combination of slower growth, declining exports, and a softening property market, along with the potential risks of deflation, poses challenges for China's economic prospects. Policymakers will likely need to carefully monitor and implement measures to support sustainable growth and address the underlying issues impacting the Chinese economy.

Consumer prices remaining stagnant in June compared to the previous year and producer prices falling by 5.4% at the factory gate have raised concerns about deflationary pressures in the Chinese economy. China's statisticians have attributed this weakness to changes in global commodity prices, particularly the falling cost of oil. However, this explanation has been deemed unconvincing, as GDP calculations are supposed to consider only the value added within China itself, excluding the impact of imported commodities.

The persistence of low or negative inflation could indicate broader deflationary trends, which can pose significant challenges to an economy. Deflation can lead to reduced consumer spending, postponed investments, and increased debt burdens for borrowers, potentially hindering economic growth and recovery. Alternatively, there is a possibility that China's statisticians may have made errors in their calculations, which could be skewing the reported growth figures. The accuracy and integrity of economic data are vital for policymakers to make informed decisions and implement appropriate measures to address economic challenges effectively.

Some members of the public express skepticism regarding the accuracy of China's official economic figures, suspecting that the actual state of the economy might be worse than what the data suggests. This discrepancy between the macroeconomic data and the public's "micro feelings" about the economy has been referred to as a "temperature difference," as described by one commentator.

In response to these concerns, Mr. Fu of the National Bureau of Statistics defended the reliability of the macroeconomic data, emphasizing that it is more comprehensive and trustworthy than individual "micro feelings." However, this response has sparked humor among netizens, with one quipping that if state statisticians claim everything is fine, individuals should adjust their feelings accordingly.

The disconnect between official data and public perceptions raises questions about transparency and the accuracy of economic reporting in China. Public trust in official figures is essential for effective policymaking and for maintaining stability in the economy.

To address this situation and ensure confidence in economic data, it is crucial for China's statistical authorities to continue improving their methodologies and practices, be transparent about data sources and calculations, and address any discrepancies or doubts raised by the public. Open communication and a commitment to accuracy and integrity are vital for building and maintaining public trust in the country's economic reporting.

Economic Uncertainties

The government's approach to addressing the current economic challenges in China appears to be cautious and measured, leaving some observers uncertain about its intentions. In the midst of the global financial crisis, when world trade plummeted, Chinese authorities responded swiftly with substantial stimulus measures that fueled economic growth not only domestically but also had positive effects on the global economy. However, the current situation seems different, as the government has not shown the same level of urgency in implementing large-scale stimulus measures.

The actions taken so far include minor interest rate cuts by the country's central bank and extensions of tax breaks on electric vehicle purchases. While these measures indicate a level of response to the economic situation, they fall short of the detailed fiscal stimulus plan that some had hoped for after the recent meeting of China's cabinet, the State Council, on Friday, the 14th.

The government's cautious approach might be influenced by various factors, including concerns about debt levels and financial risks, as well as a desire to avoid the potential negative consequences of excessive stimulus. Policymakers may also be carefully assessing the overall economic situation and considering alternative measures to support growth effectively. In such a complex economic landscape, finding the right balance between stimulating economic activity and managing potential risks becomes a delicate task.

This lack of urgency in implementing large-scale stimulus measures may be indicative of the government's enduring confidence in the ongoing economic recovery. Chinese officials could believe that the economy has sufficient momentum to achieve their targeted goals for the year, including maintaining GDP growth at around 5%. The government's restraint in deploying extensive stimulus measures may also stem from concerns about potential drawbacks associated with such actions. Policymakers may be cautious about the impact of excessive lending and spending on state-owned banks' profitability and financial discipline among local governments. A lending spree could increase non-performing loans and debt burdens, leading to financial instability in the long run.

Balancing short-term economic support with long-term financial sustainability and stability is likely a key consideration for Chinese authorities. Instead of resorting to large-scale stimulus, they might opt for more targeted and prudent measures to address specific areas of concern, ensuring that economic growth remains on a sustainable and steady trajectory.

Nonetheless, the situation remains fluid, and the government may reassess its approach depending on how the economic landscape evolves. External factors, such as changes in global economic conditions, trade dynamics, and geopolitical tensions, could also influence China's policymaking decisions in the future.

It is worth pointing out that China's economic reopening has seen a significant boost in labor-intensive service industries, particularly in sectors like restaurants, driving job creation in urban areas. During the first six months of the year, Chinese cities managed to add 6.8 million jobs, surpassing half of the government's annual target of 12 million new jobs. This robust job growth has been instrumental in absorbing some of the employment challenges resulting from the pandemic's impact on various industries.

Despite the positive employment trend, there remain specific concerns, particularly among urban youth. The unemployment rate among this demographic increased to 21.3%, indicating the need for targeted measures to address their specific employment needs and ensure their participation in the economic recovery. Overall, the country's jobless rate, which stood at 5.2% in June, has remained relatively steady and is below the government's targeted rate of 5.5%. This suggests that the economy's reopening efforts, particularly in the services sector, have been successful in generating employment opportunities and mitigating the adverse effects of the pandemic on the labor market.

But the labor market's current stability should be regarded with caution, as it can act as a lagging indicator of economic momentum. If the economic growth remains weak or encounters obstacles, unemployment rates could eventually start to rise. In such a scenario, the government may find itself compelled to take further actions to stimulate the economy and counteract negative trends.

While officials can tolerate some discrepancy between official economic data and public sentiment, they would be unwilling to overlook a substantial and persistent gap between the economy's actual performance and their predetermined targets. If the economy shows signs of falling short of the government's growth objectives or if unemployment rates begin to rise significantly, policymakers may need to reassess their approach and consider implementing more substantial stimulus measures to safeguard economic stability.

The situation calls for a careful balancing act between managing short-term challenges and adhering to long-term economic and financial objectives. Policymakers will likely continue to monitor various economic indicators closely, assess the effectiveness of the measures implemented so far, and be prepared to adapt their strategies if needed.

Ultimately, the success of China's economic recovery will depend on the government's ability to respond flexibly to evolving circumstances, ensure adequate support for the labor market and businesses, and maintain a steady course towards achieving their economic targets while addressing any emerging challenges along the way.

 

 

Notes

Hannam, P. (2023, July 16). China GDP Growth Falls Short of Expectations as Sinking Property Prices Hit Economy. Retrieved from The Guardian: https://www.theguardian.com/business/2023/jul/17/china-gdp-growth-down-economy-june-quarter-gross-domestic-profit

He, L. (2023, July 17). More Stimulus ‘Desperately’ Needed as China’s Economic Recovery Slows Further. Retrieved from CNN Business: https://www.cnn.com/2023/07/16/economy/china-economy-q2-gdp-intl-hnk/index.html

The Economist. (2023, July 17). A Feel-Bad Recovery: How Much Trouble is China’s Economy In? Retrieved from https://www.economist.com/finance-and-economics/2023/07/17/how-much-trouble-is-chinas-economy-in