Many Chinese developers have halted or delayed construction of previously sold homes due to cash flow problems. Pictured is a property construction site in Jiangsu Province, China, on October 17, 2022.
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China's economy is faltering.
Its real estate market is collapsing, deflationary pressures are spreading across the country, and the stock market has weathered a turbulent ride so far this year, with the country's CSI 300 index losing about 40% of its value from its 2021 highs.
To make matters worse, January PMI figures released by China's National Bureau of Statistics showed manufacturing activity contracted for the fourth month in a row, driven by declining demand.
Consequently, the large number of pessimistic data sparked a wave of doubts towards the second largest economy in the world. For example, Allianz has reversed its prosperous outlook for China, and now expects Beijing's economy to grow by an average of 3.9% between 2025 and 2029. This is lower than its forecast of 5% before the outbreak of the Covid-19 pandemic.
Eswar Prasad, a former International Monetary Fund official, also told Nikkei Asia that “the odds that China's GDP will one day surpass that of the United States are declining.”
Meanwhile, Mohamed El-Erian, chief economist and advisor to Allianz, highlighted the poor performance of China's stock market versus those in the US and Europe in a chart on X, saying it shows the stark difference between the three stock markets.
However, China itself is not willing to admit that its economy is in dire straits. Chinese President Xi Jinping said on New Year's Eve that the country's economy has become “more flexible and dynamic this year.”
Drawing on this optimism, it is fair to say that there are some signs of hope for the beleaguered economy, but perhaps not enough to sway the bears. For example, factory activity in China expanded for the third straight month in January, while the country's luxury goods sector appears to be recovering.
Such statements have sparked upbeat chatter among investors, suggesting that the consensus on China clearly lacks coherence.
Era of stagnation
Nobel laureate Paul Krugman has been among the most pessimistic voices on China, saying the country is entering an era of stagnation and disillusionment.
China was supposed to prosper after it lifted its strict anti-Covid-19 measures, Krugman wrote in a recent New York Times op-ed. But she did exactly the opposite
From poor leadership to high youth unemployment, the country faces headwinds from all angles, Krugman said. Krugman warns that the country's economic stagnation is not isolated, and is likely to become a problem for everyone. a
Property crisis
China's well-known real estate problems were at the core of Wall Street's bearishness toward the Asian country
The International Monetary Fund said it expects housing demand to decline by 50% in China over the next decade
Speaking at the World Economic Forum in Davos last month, International Monetary Fund head Kristalina Georgieva said China's real estate sector needed “reform”, while Beijing needed structural reforms to avoid lower growth rates.
Meanwhile, famed hedge fund manager and founder of Dallas-based Hyman Capital, Kyle Bass, said the country's debt-laden real estate market has sparked a wave of defaults among public developers. This is a problem, given that China's real estate market could account for up to a fifth of the country's GDP.
“This is similar to the impact of the American financial crisis,” Bass said, referring to the Chinese real estate market suffering from defaults.
He added: “China is going to get much worse off, no matter what regulators say: We will protect individuals from malicious short selling.”
“The infrastructure of the Chinese economy is broken,” Bass continued.
Flashes of hope
But the bleak picture for China is not shared by everyone
The Institute of International Finance said Beijing has the political capacity to push the Chinese economy towards its growth potential, and stuck to its above-consensus forecast for 2024 growth of 5%, in a recent blog post. But this view depends on sufficient stimulus on the demand side. The latest GDP figures from China for the last three months of 2023 came in below analyst estimates, coming in at 5.2%.
Meanwhile, Marko Babic, Clocktower Group's strategic partner and chief strategist, took a bullish short-term view on Chinese stocks. In an interview with CNBC on February 7, Babic said he expects Chinese stocks to jump at least 10% in the coming days as officials point to support efforts to boost the faltering stock market.
“Chinese stocks are likely to rise by 10% to 15% in the coming trading days,” Babic said.
Private bank JPMorgan also outlined bullish case scenarios for China in a recent publication. “Despite declining stock market sentiment and persistent problems in the real estate market, certain sectors of the Chinese economy have also proven resilient,” he said.
China's crucial role as a global manufacturer is unlikely to decline, the bank said, adding that cyclical demand for its exports may remain intact.
Looking to the future, China has obstacles to overcome. However, it remains to be seen whether it has the firepower to do so.
