Despite Wall Street’s earlier optimism over China’s recovery from COVID-19 restrictions, the country’s economic rebound has left investors dismayed. The iShares MSCI China ETF MCHI and Invesco Golden Dragon China ETF PGJ have fallen by 7% and 4%, respectively, so far this year. In the Chinese market, the China CSI 300 index 000300 and Hong Kong’s Hang Seng index have also declined by about 1.6% and 5%, respectively.
Contrary to expectations, consumer spending in China, which initially drove economic growth in Q1 of 2023, is not strong enough to drive GDP growth at 5% or 6% levels. As per a phone interview with lead economist Gerwin Bell, the rebound in real retail sales will not be sufficient as it is already stalling and still largely below the pre-2020 trend. Bell adds that this is the opposite of the U.S. economy’s recovery trend.
Erroneous View of China’s Boom Post Reopening
Bell refutes the earlier perception of a post-reopening boom in China, stating that the idea of relying on consumer spending to drive recovery was wrong. He suggests that consumers cannot bear the responsibility of driving the rebound as the pre-existing condition of restricted manufacturing and limited domestic consumption caused by COVID-19 continues to affect the country’s economy.
In conclusion, China’s economic recovery has failed to meet expectations, undermining Wall Street hopes that it would limit any global recession as central banks raised interest rates on the back of rising inflation.
China Targets Modest Growth
China’s economic growth last year was one of the worst in decades as it only grew by 3%. This year, the country has set a modest target of around 5%, the lowest in a quarter-century. The slowdown in growth from last year was primarily due to the property sector, not the lockdowns on the movement of people during COVID-19 restrictions.
Misunderstanding COVID-19 Restrictions
According to some Wall Street analysts, they “fundamentally misunderstood” the nature of China’s COVID-19 restrictions. The Chinese government kept most business activities running, and the lockdowns did not necessarily affect the movement of people. Instead, investors’ belief that China’s biggest problems were COVID-19 policies distracted them from the chronic illness that Chinese households are mostly over-leveraged.
Response by PBOC
In response, the People’s Bank of China (PBOC) cut two key lending rates to lower borrowing costs for companies and households. The LPR and the benchmark for mortgage rates were cut by 10 basis points to 3.55% and 4.2%, respectively. Meanwhile, the bank lowered its seven-day reverse repo rate and its one-year medium-term lending facility to further stabilise the economy post-pandemic.
China has been making strategic moves to minimise the impact of COVID-19 on its economy and promote growth. The measures taken will hopefully result in a stable economic recovery in the coming years.
Economist Views on China’s Economic Recovery
Recently, China’s interest-rate cuts have failed to stimulate its economy, as there is no demand among households or businesses to borrow. This has led to economists being disappointed, as they believe that these cuts are akin to “pushing on a string”. However, there is still potential for China’s recovery, as there may be further monetary policy easing, fiscal stimulus and government intervention coming in the near future.
One significant challenge facing China is a potential “balance-sheet recession”, which occurs when high levels of private sector debt cause individuals or companies to focus on saving by paying down debt. Even when the borrowing cost comes down, there is no spending or investment. China has a high debt-to-GDP ratio and a slowing property market, which could lead to this type of economic downturn.
To address this, some economists suggest that the public sector should take on leverage to ensure high enough nominal GDP growth, enabling the private sector to de-leverage. Austerity measures may not be the solution, as they may not help reduce debt due to the denominator effect.
China’s State Council has discussed measures to spur growth in the economy, and has pledged to roll out policy steps in a timely way amid signs that a post-COVID recovery is fading. Details and a timeline have not yet been provided. Though deep skepticism remains regarding China’s growth potential, there are reasons to be hopeful about the country’s future economic prospects.
China’s Stimulus Measures: Will It Be Enough to Stabilize the Economy?
Experts weigh in on the upcoming stimulus measures in China and its impact on the economy. While it is too early to tell, there are several rumored measures, such as removing purchase restrictions on property, lowering down payments in top-tier cities, and providing monetary support to accelerate home completions, that may help stabilize growth in the next few months.
However, some experts believe that merely stabilizing residential real estate is not enough to re-energize economic growth. Shehzad Qazi, managing director at China Beige Book, predicts that some property restrictions will likely be pulled back in the coming months, but more significant steps are required to stimulate growth.
On the other hand, PGIM’s Bell and his team are optimistic about China’s economic outlook. They believe that the monetary easing and fiscal stimulus will be larger than expected, resulting in coordinated policies by local government officials. This message from Beijing will permeate throughout the regions and have a positive impact on the economy. They remain confident that significant economic growth will recover in the next six to 12 months.
It remains to be seen what specific measures Beijing will take, but the overall effect could be quite substantial. The markets expect a lot from China’s stimulus package, but experts suggest that it may exceed expectations. With this in mind, PGIM’s Bell and his team hold a more positive outlook for China, particularly in the fourth quarter.
