By Wichard Cilliers, Head of Market Risk
The allure of prosperity often comes with unforeseen challenges, a sentiment that resonates profoundly with China’s current economic landscape. Hopes of a resounding economic revival following relentless Covid-Zero lockdowns have given way to the complex reality of deeper economic woes than anticipated. This shift in fortunes has prompted China’s central bank to take unexpected measures, such as reducing a key interest rate, to stimulate activity amidst a deteriorating property market, feeble consumer spending, and disheartening macroeconomic indicators. However, even the injection of stimulus has not been enough to instill universal optimism.
Can global expansion thrive when China falters?
As the world’s second-largest economy, China’s struggles raise a critical question: Can global expansion thrive when China falters? Recent data paints a grim picture, with numerous pillars of the Chinese economy exhibiting disappointing growth rates. Industrial investment, real estate investment, fixed asset investment, and retail sales, all key drivers, have languished in terms of growth. This anomaly is particularly unsettling as expectations were high given the easing of Covid Zero measures and the favourable base effects from the previous year.
See below the poor metrics for China:
In addition to economic struggles, China’s transparency is being called into question. Authorities’ decision to cease publishing youth unemployment figures has ignited concerns about data opacity. This move has sparked suspicions and intensified fears surrounding the nation’s data reporting practices.
China’s central bank’s surprising reduction of a key interest rate, an effort to counter deflation, highlights the gravity of the situation. However, opinions on the effectiveness of such measures are divided. While these actions might have a modest impact, they might struggle to overcome the fragile confidence and reluctance to invest, thereby potentially failing to provide a robust solution for growth.
An enigma within this scenario is President Xi Jinping’s response. With the economy facing challenges in the property sector and consumer spending, there’s pressure for new stimulus, a sentiment that clashes with previous policies aimed at avoiding financial crises. The risk of a “Chinese subprime loan debacle” looms, with the two-year-old clampdown on real estate speculation potentially exacerbating the situation. Some experts, anticipate this turmoil could accelerate property and policy support, offering a potential silver lining for Chinese stocks.
The economic upheaval is also reflected in the currency market, with the yuan nearing a 14-year low, prompting comparisons to the 2015 devaluation that caused a global stir. The divergence between US and Chinese government bond yields signals a shift in the dynamics between these two major economies, with implications for global financial markets. China’s massive debt-to-GDP ratio further exacerbates the situation, limiting the feasibility of traditional debt-fueled stimulus. The potential for a debt event in China remains an unsettling “known unknown” with uncertain global consequences.
See below a breakdown of China’s debt:
Looking beyond China’s borders, the impact of its economic struggles on the global stage is a matter of concern. US officials and market participants are raising alarm bells, with fears of a slowdown in China’s growth influencing global markets. While some experts believe that concerns might be overstated, the potential for a ripple effect cannot be ignored, especially for economies heavily reliant on commodity exports to China.
In a world where financial markets have grown less reliant on China’s growth, the exposure remains significant. The decline in China’s stock market and its shadow banking crisis point to deeper vulnerabilities that need addressing. As the challenges persist, the global community watches with bated breath, poised to navigate the uncertain waters of China’s evolving economic landscape.