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China GDP: ‘rising uncertainty’ as economic recovery slows amid mounting problems
- Waning confidence in China’s economic growth has been spreading, with its recovery appearing to have fizzled out after registering 4.5 per cent growth in the first quarter
- Global investment banks have revised down their second quarter sequential growth forecasts, down from over 4 per cent on average to around or less than 1 per cent
Passing Chinese customs with so much cash could be risky, as China – which has strict capital control – only allows travellers to carry up to US$5,000 in foreign currency per trip without declaring it.
But Yu decided to take the risk, as it was a great time to deposit the money into a Hong Kong bank as the interest rates have been so high thanks to multiple rate increases by the US Federal Reserve. More importantly, he felt the urgency to deploy some overseas assets.
“The uncertainty about China’s economy is rising, so there is a sentiment that it is safer to have some money physically outside of China,” he said.
Yu is far from alone. That afternoon, he waited for over 40 minutes at a branch of HSBC, with many Mandarin speakers queuing in front of him also depositing stacks of US dollars.
A lack of confidence in China’s future economic growth has been quickly spreading, as its post-coronavirus recovery appears to have fizzled out after registering 4.5 per cent growth, year on year, in the first quarter.
Premier Li Qiang has said that China’s economic growth in the second quarter – which is set to be released on July 17 – will be faster, but the rate is more likely to be higher due to a much lower base a year earlier rather than a solid growth, economists said.
Most global investment banks have revised down their second quarter sequential growth forecasts, down from over 4 per cent on average to around or less than 1 per cent, in contrast to 2.2 per cent quarter on quarter growth in the first three months of the year.
They have also slashed their annual growth forecasts, moving closer to Beijing’s modest target of “around 5 per cent” for 2023 set in March.
An indicator of economic sentiment, the yuan tumbled by 5.7 per cent against the US dollar in the second quarter. The currency weakness, in turn, has further fuelled negative sentiment.
Economists said the Chinese currency is expected to face more pressure as a recent slew of stronger-than-expected US economic data may lead to more interest rate increases, compared to more anticipated policy easing from the People’s Bank of China (PBOC) amid a sputtering recovery.
“The initial forecast for this year – US recession and Chinese rebound – is not happening. On the contrary, the US is growing, and China is slowing,” said Ipek Ozkardeskaya, a senior analyst with Swissquote Bank.
“At this point, the Chinese government has no choice but to regain people’s and investors’ confidence if it doesn’t want to become too old before becoming rich enough,” she said, as the world’s second-largest economy is also facing a looming demographic crisis, after its population declined for the first time in 60 years in 2022.
When China fully restarted its economic engine in January, economists expected that domestic consumption and investment would be the key drivers, along with fading curbs on households and businesses, and worsening geopolitical tensions.
While the much-anticipated revenge spending did materialise, and although new businesses did spring up, the trend did not last.
In April, the manufacturing sector fell back into contraction and growth in the service sector started to slow down.
Ding Shuang, chief Greater China economist at Standard Chartered Bank, said consumers and private firms still have the ability to spend and invest, but they lack the expectation for a steady future income.
Despite repeated pledges from Beijing that it will boost confidence in the private sector, Chinese firms are still reluctant to make long-term commitments and investments, Ding added.
“There are doubts on whether the private sector can really be treated equally compared to the state-owned enterprises (SOEs), and the stringent pandemic control measures in the past three years are still shadowing their investment decisions,” Ding said.
In the first five months of the year, investment from the private sector – which accounts for over 55 per cent of the overall investment – declined by 0.1 per cent, in contrast to 4 per cent overall growth and a 8.4 per cent rise from SOEs.
Last month, to help prop up the stalling economy, the PBOC lowered its one-year loan prime rate – the medium-term lending benchmark for corporate loans – to 3.55 per cent, and also reduced the five-year rate – which is a reference rate for mortgages – to 4.2 per cent.
But these cuts were “almost wasted”, Ding said, as the interest rates were already low enough.
“The problem now is not that private firms’ financing costs are too high, or they cannot get loans,” he added.
Jobseekers in China are also facing the most difficult employment market in decades, with the youth unemployment rate hitting a record 20.8 per cent in May.
The overall urban surveyed jobless rate remained unchanged at 5.2 per cent last month, but there have been frequent reports of lay-offs and pay cuts across various sectors.
The rising uncertainties have prompted residents to cut spending, repay mortgages ahead of time, and increase their precautionary savings despite low interest rates, Sheng Songcheng, a former head of the central bank’s statistics department, said in an article last month.
“For precautionary savings, the most important factor is the security and convenience of funds, not the level of interest,” said Sheng, who is currently adjunct professor of economics and finance at the China Europe International Business School in Shanghai.
“Therefore, cutting interest rates will not bring about a decline in the scale of precautionary savings, making it difficult to achieve the expected goal of stimulating consumption growth. Instead, it may prompt people to further increase savings.”
For the export sector, which contributed to around one fifth of China’s annual economic growth in 2020-22, the outlook is set for more weaknesses this year amid geopolitical tensions with the United States and slowing global demand, industry insiders and analysts said.
“A weakening yuan is theoretically good for boosting exports, but the favourable factor has no way to resist the general trend, like US reshoring and weak demand,” said a Jiangsu-based shipping agent, who only gave his name as Xu.
Lu Ting, chief China economist at Nomura, said the markets had underestimated the negative shock from the ongoing property market downturn and the negative impact of worsening geopolitical tensions.
“As the external environment is difficult to improve in the short term, the central government still needs to boost the real estate sector, as it is the backbone of the Chinese economy,” Lu said in an article last month.
As the most crucial pillar of China’s economy, the property sector contributed around a quarter of the country’s gross domestic product before Beijing reined in the debt-ridden market in 2021.
It is the most important source of fiscal revenue, and the biggest component of urban household wealth.
Lu said while the central government should increase spending against the backdrop of weak private investment and consumption, as well as struggling local government finances, Beijing should avoid too much interference in the private sector and stay clear of creating more inefficient debt.
“What is even more critical is to firmly grasp the role of real estate, follow the trend of urbanisation, let the market and the government take their respective positions to balance the supply and demand of housing,” he said.
‘China is slowing’: economic recovery stalls as yuan slips, uncertainty abounds
Waning confidence in China’s economic growth has been spreading, with global investment banks revising down their second quarter sequential growth forecasts ahead of the release of the data later this month.
www.scmp.com
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