Is Chinese Economy seeing a turnaround? 

Economic data released for August 2023 by the Chinese National Bureau of Statistics( NBS) shows encouraging numbers as value added industrial output increased by 4.5% YoY higher than July reported at 3.7%, retail sales grew by 4.6% YoY accelerating from 2.5% reported in July showing a turnaround from deflationary indicators widely conceived earlier. It is believed that the encouraging performance was bolstered by strong consumption growth including the automobiles and services industry even though the external factors like sluggish global demand and protectionism and the internal factors such as insufficient domestic demand and operational challenges of the domestic enterprises are weighing down significantly on the recovery process. 

China earlier had announced a horde of supportive policies in late July that continued in August to boost domestic consumption and foreign investment including support for expanding real estate and auto sales. On Sept 14^th, the People’s Bank of China, the Central Bank, cut back on the Reserve Requirement Ratio (RRR) by 25 basis points releasing more than 500 billion Yuan ( USD 68.7 billion) liquidity in the economy. JP Morgan  and ANZ raised their forecast for 2023 GDP growth by 20 basis points to 5% and 5.1% while Goldman Sachs kept its 3^rd quarter growth unchanged at 4.9% YoY saying China’s economy is in a tug of war between persistent growth headwinds and increasing policy support. It is true that economic growth numbers are skewed because of uneven past but a projected growth of ~3% for the next 5 years is surely a dampener to China’s potential considering the resources at its disposal. 

Many economic experts however believe Liquidity is not the main problem. It is the public confidence that is lacking. Capital Expenditure is at its low with private enterprises at less than a % growth, per capita spends in shopping malls and restaurants are seeing a 20% drop and import data weakening in the first 7 months of the calendar potentially reflecting weak domestic demand. The views hint at multiple  structural and other challenges: slumping productivity, a shrinking labor force, restrictions on the transfer of technology imposed by the United States and other countries, an ongoing real estate bubble’s correction, elevated unemployment among younger workers, and a leadership that seems to prioritize party control and national security over economic growth.  Real Estate that traditionally contributed 30% of China’s GDP unlike a 20% in Japan or South Korea has been experiencing  a noticeable drag clearly highlighting an area of concern. Goldman Sachs reported .. “Given that majority of (high yield) developers have either defaulted or conducted bond exchanges, we believe rising stresses amongst the remaining (high yielding) developers are unlikely to have an impact on the offshore bond market”. Unemployment figures have been spiralling up since 2022 staggering to ~21% in June 2023 compared to ~15% in 2022. Demographics (ageing population) and High Debts are identified as critical structural challenges that China has to battle. 

Contrary to common belief that geo political issues are responsible for China’s slow down, many experts have hit hard on China’s own policies holding them responsible for its slackening growth. Zero covid policy, unwillingness to open the doors to private sector, lack of investments in infrastructure during covid period are stated as factors. 

In my view China’s political and diplomatic priorities will also have a significant bearing on its future. If it increasingly alienates itself, global supply chains will soon find options to serve the rest of the world without its participation, leaving China to serve its own domestic demand.