Chinese Economy Underwhelms As Struggles Continue

It’s fair to suggest a sense of fatalism has set in among investors regarding the prospects for China’s economy.

Six months ago, many (I dare say most) macro watchers assumed a Chinese economic rebound would be one of the stories in 2023. Instead, there was no rebound, or at least not one that looked anything like the dynamic recovery market participants were told to expect.

Domestic demand is anemic, exports are under pressure, there are still far more questions than answers around the property sector, PBoC easing comes across as weak-willed and there appears to be little appetite for “shock and awe” fiscal support.

It looks hopeless, frankly. The legacies of the pandemic curbs and Xi Jinping’s regulatory crackdown are an albatross. Foreign investors will never fully trust him again, if they ever trusted him in the first place. On the domestic front, China appears stuck in limbo between a smokestack, command economy and a modernized, consumption-driven model.

The whole thing has an air of absurdity to it: Everyone, including anchors and journalists for Western media outlets, has to pretend Xi isn’t the ruthless dictator he most assuredly is. That somehow, he’s different from his “no limits” strategic partner in Moscow.

That charade is necessary because of China’s economic and military heft. Regardless of how poorly the economy performs, it’s still absolutely mission critical to the future of global trade and commerce, so everyone has to pretend China isn’t a totalitarian state.

That’s the backdrop for Q2 GDP figures and June activity data released on Monday. At 6.3%, the GDP print was well below estimates. Consensus was 7.1%.

Recall that Q2 2022 was a nightmare for China. In addition to being an international spectacle, Xi’s Shanghai lockdown kneecapped the economy to the chagrin of… well, to the chagrin of everyone, if we’re honest. Even proponents of strict pandemic protocols viewed the episode as anachronistic, at best.

Xi pretended the lockdown was a resounding success, though. Apparently, he saw some utility in sticking to the strategy until the Party congress in October, when he effectively consolidated all power in himself. Less than two months later, amid rare street protests, he abruptly abandoned the COVID curbs, setting the stage for an economic recovery that didn’t happen.

The rest of Monday’s data was mixed. And that’s me being generous. Retail sales were lackluster, rising just 3.1%. Consensus was looking for 3.3%.

That’s not surprising. CPI is flat, credit demand is very weak and producer prices are deep in deflation.

Industrial production was a solid beat, rising 4.4% against estimates for a 2.5% YoY increase. YTD, fixed asset investment is up 3.8% versus the same period a year ago, better than expected.

I suppose this goes without saying, but these figures aren’t likely to impress anyone. The youth unemployment rate hit another new record north of 21%.

That share may rise going forward. Joblessness among young people is a source of consternation for the Party for a variety of obvious reasons.

I’ll revisit the data once I have a look at the breakdown and get a sense of the analyst community’s collective assessment, but on a quick read, the numbers did nothing to change the narrative.