The Chinese economy’s a mess. I’ve run out of academic ways to say as much.
Every day brings additional evidence to support the contention that with allowances for the fact that the Party wouldn’t report an outright contraction in economic activity under anything but the direst of circumstances (e.g., during a pandemic), the country’s in what, for China, counts as a “recession.”
A year, maybe two, ago, a reader whose professional bio suggested he managed other people’s money for a living (or was at least involved in managing other people’s money), told me China’s economy was fine. You could tell, he said, because the headline GDP prints emanating from Xi Jinping’s beholden bureacrats said growth was running at or near 5%. It was an assessment so naive it could only be forgivable coming from someone younger than 35. Fortunately, that young man was a late-twentysomething.
Since then, the situation in China is meaningfully worse. Maybe “worse” isn’t the best word choice. You can always find a macro metric or two on which a country’s improving. Let’s say, instead, that the situation in China’s more urgent than it was, where that means the risk of deflation is now more acute simply by virtue of how long the consumer was allowed to languish.
I made that case in the aptly entitled “China’s Screwed,” in which I illustrated the readily apparent lack of credit demand, a classical harbinger of pernicious disinflation.
With consumption moribund, China’s relying on its factories and, ultimately, exports, to prop up growth. But data released over the weekend showed manufacturing still mired in a multi-month malaise. Indeed, the official manufacturing PMI for August printed 49.1, the worst showing since February.
The gauge, published by the NBS, hasn’t been above the 50 demarcation line since April. Consensus wanted 49.5.
Although the non-manufacturing index managed a slight uptick to stay above water, you’ll note that the construction component continued to slip, printing 50.6, just barely in expansion territory.
The lackluster readings underscored the notion that the Chinese economy’s going nowhere on good days, and retracing on all the others. Separately, provisional data from China Real Estate Information Corp. suggested the value of new home transactions last month plunged almost 27% YoY across China’s largest real estate firms. That was (meaningfully) worse than July’s 20% drop.
This comes as Beijing struggles to craft a coherent approach to resuscitating demand. During some weeks, it almost seems as though Xi’s not all that interested, or at least not if it means wielding a fiscal bazooka to revive the household consumption impulse.
There’s some evidence that the Party recognizes the urgency. Bloomberg reported two days ago that Beijing may move to facilitate en masse mortgage refis, while China’s megacities are now joining smaller locales in removing price controls on new construction, a high-risk gamble increasingly seen as the only viable (or at least the only expeditious) way to clear bloated inventories and help the perpetually beleaguered property market find a bottom.
Ultimately, the story’s the same as it ever was, though: China needs big-ticket fiscal stimulus designed specifically to deliver a defibrillator shock to households who desperately need an impetus to spend. There’s no demand. Working on the supply side of the credit equation isn’t going to work. I don’t know how much additional evidence the Party needs to be convinced of that, but if it’s more proof they seek, they’re surely going to get it in the form of more unwanted disinflation if they don’t take a hint.
Xi’s obstinance on that point might be excusable were the geopolitical environment not so fraught. But it is. Fraught, I mean. China isn’t going to be able to buy time by running the factories hot and exporting the resultant overcapacity. A Western world fed up with Beijing on multiple fronts won’t countenance that, particularly now that inflation across the G7 has ebbed such that advanced economies don’t need China’s deflation, particularly not if importing it undermines the political center in Western capitals by knee-capping domestic industries.
“Growth [is] led by exports [and] China is exporting deflation but Western countries are not having it,” BofA said, noting that Canada has now joined Europe and the US with 100% tariffs on Chinese EVs and large levies on steel.
“China’s economy, given its sheer size, cannot run on manufacturing and exports alone,” SocGen’s Wei Yao and Michelle Lam remarked. “To meet [the] GDP target, policymakers need to step up support more meaningfully, but there has been no strong indication of this yet.”
There’s too much bad debt and will built up. China is beginning a long-term decline. The only reason it had a golden age is because it stole it from the global middle class, in exchange for cheap crap at Walmart for a decade or so. The previous Chinese leadership knew what it was doing and knew to keep its head down, but there’s always somebody that wants to play tough guy (I.e., Xi). Nationalism is a fool’s game that leads to ruin.
I don’t see how it gets much better from here. With a population set to decline significantly in the next 30 years, a decline in manufacturing, and what will eventually become a bloated national debt, I’m not sure how the “engine” for global growth ever recovers. But that’s just my simple, yet cynical mind talking. One more reason why I feel like cash is king for the foreseeable future…a future that is getting shorter by the day.
There was a good if brief article in the Economist April 13 2024 “The Ageing Autocracy” which said the Chinese market for adult diapers would overtake the market for infant diapers in 2025.
I wonder how the next US administration will design the next round of tariffs on imports from China. I’m assuming best case they will use the components of PCE-PPI-CPI and the breakdown of US employment by industry, to devise tariffs with minimum inflationary effect and maximum employment / industrial policy / national security effect; worst case they will slap big blanket tariffs on everything, including things that the US has little interest in producing domestically.
Either way, with the US, Europe, Canada actively throwing up barriers to Chinese products, and some LatAm and APAC countries thinking about it, Xi’s problem is only going to get worse.
I also wonder if China is as able to engage in massive-scale fiscal stimulus as we might think.
If the US did $4TR of fiscal stimulus in the pandemic, that’s about $13K/person, or call it about half of per capita personal income (including children, elderly, non-working, the US per capital income is lower than I’d have thought, around $25-30K per varying data sources). China’s per capita personal income is something like $5K (using estimates for “disposable income” and converting to USD). Half of that times the population is call it $3TR.
So granted these #s are all rough and crude, but basically if China wanted to do US-in-pandemic size fiscal stimulus, it might need to spend $3 trillion, if it wanted to do one-third that size fiscal stimulus, it might need to spend $1 trillion.
How would Xi raise $3 trillion or $1 trillion? He can’t lean on local governments to raise it – they are struggling, in large part because Xi already made them spend hugely on his Covid lockdowns.
Will he sell Chinese central government bonds to foreigners? (I say to foreigners, because if domestic Chinese buy the bonds then that is like a massive spike in the savings rates, not what he would want.) I question if the actual foreign demand for such bonds is large enough.
Does he sell a significant part of China’s FX reserves (i.e. his Treasuries, etc) to foreigners? That would be very interesting.
Does he do the MMT thing and print CNY? Even more interesting.
I’ve not seen analysis of this – the necessary scale of Chinese fiscal stimulus and how it would be done – and would love to be pointed to some.
And, if its to be done by income redistribution instead, say $1-3TR redistributed from industry and government to consumers, how could that possibly be done, in a fairly short period, without major disruption and risk?
Again, I’m all questions and no answers, but if there aren’t answers, then isn’t Xi “stuck” in this hole?
JL – you are asking for a scolding from our Dear Leader. They can simply issue Renminbi. If they want to keep a fig leaf of economic orthodoxy, they can do it Japanese style by having the finance ministry issue paper to the central bank. Granted that was easier because Japan is pretty much self-funded.
Back in May China announced it would issue $140BN of ultra-long (20-50 yr) “special onshore” central govt bonds which “will not be counted towards the official fiscal deficit.” (Reuters article). These were sold to domestic buyers, presumably in lieu of spending. property purchases, and other investment.
I found these estimates of the scale of stimulus required – as much as $1TR – which are not unlike what I’d thought. No discussion of funding source, though. @d, I am too weak on economics and Chinanomics to guess whether China would print RMB or what the knock-on effects might be.
To revive consumption just to its pre-pandemic trendline would require 3 trillion yuan to 8 trillion yuan ($400 billion-$1 trillion) in spending, said Christopher Beddor, deputy China research director at Gavekal Dragonomics estimates, who thinks that much stimulus is unlikely.
“The government’s track record of delivering on consumer stimulus is frankly pretty poor,” he said.
Xu Hongcai, deputy director of the economic policy commission at the state-backed China Association of Policy Science, said boosting demand sufficiently might need re-allocating 5 trillion yuan from investment projects to consumers.
“In the short run, 5 trillion yuan in stimulus would be forceful,” Xu said. “But in the long run, we need to improve the proportion of income of urban and rural residents by 20 percentage points of national income.” ”
https://www.reuters.com/world/china/china-needs-more-than-incremental-consumer-stimulus-longer-term-2024-08-01/