The writer is chair of Rockefeller International
Something is rotten in the Chinese economy, but don’t expect Wall Street analysts to tell you about it.
There has never been a bigger disconnect, in my experience, between some of the rosier investment bank views on China and the dim reality on the ground. Perhaps reluctant to back off their calls for a reopening boom this year, sellside economists keep sticking to their forecasts for growth in gross domestic product in 2023, and now expect it to come in well above 5 per cent. That’s even more optimistic than the official target, and wildly out of line with dismal news from Chinese companies.
Hopes for a reopening boom were based on the premise that, once released from lockdown, Chinese consumers would go on a spending spree, but company reports show no sign of one. If China’s economy were growing at 5 per cent, then based on historical trends corporate revenues should be growing faster than 8 per cent. Instead, revenues grew at 1.5 per cent in the first quarter.
Corporate revenues are now growing slower than officially stated GDP in 20 of China’s 28 sectors, including consumer favourites from autos to home appliances. Weak revenues are in turn depressing earnings for consumer goods companies, which normally track GDP growth quite closely, but shrank in the first quarter. Instead of a reopening rush, the MSCI China stock index has fallen 15 per cent from the January peak and consumer discretionary stocks are down 25 per cent since then.
If the analysts were right, and consumer demand was picking up in what one described as a “boomy” economy, imports would be strong. Imports fell 8 per cent in April. When retail sales and industrial output came in way below analysts’ estimates last week, one attributed this miss to “seasonal adjustment”, as if spring had come unexpectedly this year.
China’s credit growth is weakening too, up by just Rmb720bn ($103bn) in April, half as fast as forecasters expected. The debt service burden of Chinese consumers has doubled in the past decade to 30 per cent of disposable income — a level three times higher than in the US. Many Chinese youth need a job before they can join a spending spree: urban youth unemployment is rising and last month topped 20 per cent.
These facts point to the source of the rot. Since 2008, China’s economic model has been based on government stimulus and rising debt, much of it pouring into the property markets, which became the main driver of growth. With debts so high, the government was much more restrained in its stimulus spending during the pandemic.
By the start of this year, the Chinese had accumulated excess savings during the pandemic equal to 3 per cent of GDP. The comparable figure in the US was 10 per cent of GDP. While the US got a big reopening boost from stimulus, China did not get one this time.
A growth model dependent on stimulus and debt was always going to be unsustainable, and now it has run out of steam. Much of the stimulus over the past decade had flowed through local governments in China, which used their own “financing vehicles” to borrow and buy real estate, propping up the property markets. Those vehicles are fast running out of cash to finance their debts, which is curbing their investment in the property market and industry as well. Industrial sectors are slowing faster than the consumer-related businesses at the centre of the reopening story.
Though Beijing still aims for growth of 5 per cent, its potential has fallen to half that. Potential for GDP growth is a function of population and productivity growth: China’s negative population growth means fewer workers are entering the labour force, and heavy debts are slowing output per worker.
China’s government has long been suspected of massaging its GDP numbers to hit its growth targets. But cheerleading from Wall Street seems to be reaching a crescendo now, as analysts who called for a reopening boom find it more opportune to stay the course — even if this requires highly selective use of official data — than to reverse themselves.
While analysts may have little to lose from rosy forecasts, the rest of us do. “Boomy” chatter has contributed to investors’ loss of hundreds of billions of dollars in China in just the past four months. Further, global growth may prove weaker than expected in 2023, since the hope is that a US downturn will be countered by the China reopening boom, which may never come. It is time to expose this charade before the fallout gets worse.