The slowdown which crept into the Chinese economy with emergence of Covid, is showing little signs of ebbing. For more than three years now, various forms of policy support have remained largely ineffective in reviving the growth rate of the world’s second largest economy. Many measures which seem to work for a few quarters lose steam when the policymakers start to feel optimistic about the growth trajectory in medium and long term. The factors behind this phenomenon are many, often working in combination to suppress the economic activities and investor sentiments. Analysts count declining global demand, deflationary risks, record local government debts and spiking youth unemployment as major ones.
Regular flow of data on economic indicators has so far failed to paint a promising picture about upcoming quarters. The latest data made available by China’s National Bureau of Statistics (NBS) reveals that in May 2023, Industrial output grew 3.5 % from a year earlier. This represents a significant slowing down from the 5.6 % expansion seen in April. The update comes on the heels of widespread concerns about manufacturers’ struggle with weak demand at home and abroad. Similarly, retail sale which is considered a key gauge of consumer confidence – rose by 12.7 %, slowing from April’s level of 18.4 %. Matching the steps of industrial and retail data are the figures of factory surveys, home sales, trade and loan growth; exhibiting signs of weakness. According to a report by Goldman Sachs, the year-on-year fall of 21.5% in property investment in May was the steepest since at least 2001. This is significant considering the dream run property market and real estate development had in China for more than a decade. At the same time, youth unemployment rate touched a record of 20.8%. NBS spokesperson, Fu Linghui, was recently reported in media saying that “More efforts need to be made to stabilise and expand employment for young people.”
Meanwhile, lack of external demand is making the slowdown stress increasingly visible at factories across the country where strikes rate has reached seven-year high. The weak global demand hurting the Chinese manufacturers is believed to be an outcome of central banks in the US and Europe repeatedly raising interest rates to cool inflation. According to the figures released by China’s General Administration of Customs (GAC) in June 2023, China’s trade surplus shrank by 16.1 % in May 2023 to reach $65.8 billion, compared to May 2022. While exports declined by 7.5 % during the month, the imports also fell by 4.5 % as compared to same month last year.
Major indicators of industrial activity including crude, coal and steel output also witnessed month-on-month falls in May, 2023. The latest data seems to have prolonged government’s wait to see some sustainable uplift in economic performance, given last year’s very weak performance, when many cities were under strict COVID lockdowns. A recent research note of Nomura states “The post-Covid recovery appears to have run its course, an economic double dip is nearly confirmed, and we now see significant downside risks to our below-consensus GDP growth forecasts of 5.5% and 4.2% for 2023 and 2024, respectively”.
Earlier this year, some speculation was observed around a possible rebound in economic activities owing to support measures taken by the government. The momentum appears to be lost again, prompting China’s central bank to cut some key interest rates in June, 2023. Following the rate cut, the yuan hit a six-month low. Independent researchers assess that sluggish domestic as well as external demand would not allow the momentum to pick up in the next few months. While some of policymakers advocate increased push by the government to get the economy out of this situation, others wants Beijing to be cautious as more stimulus could heighten capital flight risks. The nature of prolonged crisis should push Beijing towards deeper analysis of its economic model which looks more outwards than inwards. Consistent pursuit of opportunities outside in form of manufacturing or infrastructural development makes it more vulnerable to external economies. Some structural reforms around making its more robust to global shocks may offer some help.