China’s Economy May Never Recover Pre-Pandemic Vibrancy

For about 24 hours, financial media outlets and some bank analysts were convinced that Beijing’s fragmented efforts to piece together an economic rebound might finally be working.

Home sales jumped over the weekend, presumably due to the relaxation of some mortgage rules, makeshift indexes of Chinese property developers rose to start the week and Country Garden is apparently making some progress in fraught efforts to negotiate around coupon and principal payments.

Of course, nothing has actually changed. The Chinese economy is mired in what, for China, counts as a recession, and the government hasn’t addressed the situation — not really, anyway. Fast forward to Tuesday, and the Caixin services PMI underscored the point.

At 51.8, the gauge managed to stay in expansion territory, but the reading was the worst of 2023 and represented a meaningful deceleration from July.

Both the official and private gauge are one bad month away from contraction, although the Party could always just “manage” the official number for September if the survey doesn’t cooperate.

It’s worth noting that a new Bloomberg Economics report shows the Chinese economy will be expanding by just 3.5% in 2030 and by just 0.9% in 2050. The research piece suggested China may not be on track to overtake the US economically anymore.

“A key implication of a steeper slowdown is that China is no longer likely to become the world’s biggest economy soon, or ever on any consistent basis,” the report said, adding that even if China’s GDP is higher than America’s by the “mid-2040s,” it’ll likely recede back below US GDP in fairly short order.

If you have a terminal, you should read the full analysis. It’s well worth your time. If not, the summary on Bloomberg’s public website will suffice (here).

For context, prior to the pandemic, Bloomberg saw China overtaking the US within a decade in one scenario.

The analysis blames, in part anyway, a potentially permanent loss of confidence in the Party’s capacity to manage the economy. They didn’t use the word “permanent,” but they almost did. The hit to confidence engendered by Xi’s policymaking over the last three years “risks becoming entrenched,” the report warned. That could manifest as “an enduring drag” on China’s growth potential.

For their part, SocGen said China can likely avoid a financial meltdown, but “can’t escape at least three to five years of depressed growth and inflation while it goes through a state-driven (or at least assisted) debt restructuring.”

The bank’s Wei Yao and Michelle Lam tried to offer a constructive take, but their assessment was appropriately cautious. “GDP growth fell to an annualized rate of 3.2% in real terms and 2.4% in nominal terms in Q2 2023 and there looks to be a further deceleration in the current quarter,” they said, in a two-dozen-page report.

So, no, China’s economy isn’t growing at anywhere near a 5% pace currently. Ironically, that might be the good news. “The transition to a much slower growth trend has already played out,” SocGen said. “In our scenario of no financial crisis, growth could still fall further in the near-term, but not by a lot, and the pain would manifest in the form of a muted recovery and sustainably depressed growth.”

There it is again. Call it “sustained,” “enduring,” “permanent” or whatever you like, but the message is the same: Chinese economic activity might’ve reset lower. The forces constraining the world’s second largest economy may last in perpetuity.

This was the subject of August’s Monthly Letter+. I’m including a few short excerpts below. They capture, succinctly, the crux of the problem.

Over the past three years, Xi’s turn for uncompromising authoritarianism led directly to increasingly poor economic outcomes. The Party’s draconian approach to COVID lockdowns looked like (and was) a success story early on, but became an anachronism over time. The rest of the world (or nations with the financial wherewithal anyway) inoculated themselves with the best vaccines and moved on. Xi could’ve approved and distributed Western mRNA vaccines anytime he wanted. But he didn’t.

The cost of sticking with strict lockdowns to control outbreaks went well beyond the economy. By November of last year, Xi found himself staring at a restive populace. Over the same three-year period, his heavy-handed approach to addressing property sector excesses precipitated a rolling crisis which continues to pose a serious threat to the economy, and his efforts to rein in big-tech looked disproportionate and overboard to outside observers.

At the same time, Xi’s efforts to institute one-man rule and claim for himself more power than any Chinese leader since Mao intensified. The Party acquiesced, and their subservience showed up in mentions of Xi as the “core” and in incessant references to “Xi Jinping Thought.” Catchphrases like “common prosperity” became excuses for an exceedingly mercurial approach to regulation. And on and on.

It’s no coincidence that the Chinese economy continues to struggle in the face of such a domineering, omnipresent approach to managing China’s domestic affairs.