China and its 5 economic recovery dilemmas

17 April 2024 - 15:00

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Will China really be able to grow in 2024? How much longer will the crisis last? According to economists, the answers are concentrated in 5 points.

China and its 5 economic recovery dilemmas

The China growth debate continues to fascinate economists globally.

The recovery of the Asian giant is one of the great unknowns of 2024, a year that began under the banner of uncertainties in various areas, from the trend of inflation to the Fed monetary policy up to the maximum alert for national debts and the alarm about the consequences of two ongoing wars with unpredictable outcomes (with potential effects on raw materials).

The world’s second-largest economy started the year on solid footing, with Chinese factories in full recovery. Analysts warn, however, that it will be difficult to maintain growth without a broader improvement that restores full confidence among consumers. Recent bright spots in trade and manufacturing have prompted economists at banks including Goldman Sachs Group Inc. to upgrade their outlook for 2024.

However, with exports unexpectedly falling in March and foreign demand largely driving new orders, politicians still desperately need to convince citizens to spend, according to several analyses. Furthermore, in a very unstable and worrying geopolitical context, the fate of the Asian power is even more important. The analyzes collected by Bloomberg are focusing on at least 5 key factors to understand where China’s economy will go.

1. Industrial production

The indicator is one of the most significant for economists, as it measures the total value of output from factories, mines, and utilities – in other words, a huge amount of activity. In the first two months of the year, it increased at the fastest pace in the last two years and analysts expect a 6% increase in March compared to the previous year.

A complementary indicator is energy production, which tends to be correlated with industrial data since it is the sector with the highest energy consumption. “Economists are looking for other numbers to confirm or double-check government data on economic growth,” said Larry Hu, chief China economist at Macquarie Group Ltd.

Energy production has been recovering since China reopened from Covid-related restrictions more than a year ago. The collapse in coal prices has made plants more willing to produce, and energy consumption has improved in recent months.

2. Real estate

Stabilizing the real estate market, where Chinese families have deposited vast reserves of wealth, is critical to the nation’s economic recovery: such a move would boost sentiment, encourage consumer spending, and spur greater investments.

However, reaching this goal appears far away. Home sales fell 33% in value in January-February from a year ago, the most since May 2022, and will likely contract again in March. New home sales are considered an important indicator of sentiment, investment, and prices, said Haibin Zhu, chief China economist at JPMorgan Chase & Co.

New home sales are still very weak, which supports our forecast of a third consecutive year of contraction in housing activity,” he added. The contraction in real estate investment also worsened in March, even as authorities eased house-buying rules to encourage sales.

3. GDP

China’s economy has been in a deflationary phase since last year, with weak wage and price growth. Last month’s decline in producer prices pointed to more deflationary pressure ahead. Consumer prices are also hovering close to the negative threshold.

That’s why Nominal GDP matters, according to Robin Xing, chief China economist at Morgan Stanley.

The nominal rate is also used to calculate China’s GDP deflator, the broadest measure of growth in the economy. Three-quarters of last year’s decline marked the longest decline since 1999, underscoring the divergence of China’s economy from its biggest rival, the United States, where high inflation is proving difficult to beat.

The analysis of Statista analysts should also be considered. In 2022, China’s gross domestic product (GDP) was approximately $17.9 trillion. Compared to the GDP of the other BRIC countries, India, Russia, and Brazil, China ranked first and second in the world rankings that year. In 2022, GDP per capita in China reached about 12,670 US dollars.

China’s economy grew rapidly in the past, but China’s real GDP growth rate has gradually slowed down in recent years, and annual GDP growth is expected to be only around 4% in the years following 2023.

4. Credit growth

Even though the manufacturing sector looks solid, there is a distinct lack of confidence in lending. New bank loans increased at the slowest pace on record in March, suggesting that businesses and households are not yet feeling a full recovery. Meanwhile, a broad measure of credit expanded at its slowest pace ever, according to data going back to 2017.

Weak credit momentum points to persistent brakes on activity,” said Frederic Neumann, chief economist for Asia at HSBC Holdings Plc. “A recovery cycle without credit will be difficult to sustain.”

5. Job market

China has another deep-rooted problem: a weak job market. The unemployment rate has risen in recent months and many younger workers are still struggling.

There are also recent reports of layoffs in some parts of the country. Wages offered to new employees increased in the first quarter after seeing a record decline at the end of 2023, offering a glimmer of hope to workers.

Higher wages would signal reflation and that “companies are hiring and investing and the labor market is becoming tighter,” Morgan Stanley’s Xing said. It would be “a good sign that China can break out of its deflation cycle.”

Original article published on Italy 2024-04-15 13:04:38. Original title: La Cina e i 5 dilemmi sulla ripresa

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