Many Chinese developers have stopped or delayed construction of pre-sold homes due to cash flow problems. Pictured here is a construction site in Jiangsu province, China, on October 17, 2022.
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The Chinese economy is faltering.
Its housing market is crumbling, deflationary pressures are spreading across the nation and its stock market has weathered a turbulent period so far this year, with the country’s CSI 300 index wiping off about 40% of the its value compared to the peaks of 2021.
Adding salt to the wound, January PMI data released by China’s National Bureau of Statistics showed manufacturing activity contracted for the fourth consecutive month, led by slumping demand.
The series of negative data has consequently triggered a wave of skepticism towards the world’s second largest economy. Allianz, for example, has reversed its optimistic view of China, now forecasting that Beijing’s economy will grow by an average of 3.9% between 2025 and 2029. That’s down from its forecast of 5% before the outbreak. of the Covid-19 pandemic.
Former International Monetary Fund official Eswar Prasad also told Nikkei Asia that “the likelihood that China’s GDP will one day surpass that of the United States is declining.”
Meanwhile, Allianz chief economist and consultant Mohamed El-Erian highlighted the disappointing performance of the Chinese stock market compared to that of the United States and Europe in a period graph on Xstating that this demonstrates the clear divergence between all three stock markets.
China itself, however, is unwilling to admit that its economy is in tatters. Chinese leader Xi Jinping said on New Year’s Eve that the nation’s economy has become “more resilient and dynamic this year.”
Feeding on that optimism, it’s fair to say there have been some signs of hope for the beleaguered economy, but perhaps not enough to sway the bears. For example, industrial activity in China increased for the third consecutive month in January, while the domestic luxury sector appears to be recovering.
Such data has sparked bullish chatter among investors, suggesting that consensus on China is clearly uneven.
Era of stagnation
Nobel laureate Paul Krugman has been among some of the most bearish voices on China, saying the country is entering an era of stagnation and disappointment.
China was expected to prosper after lifting its stringent “zero-Covid” measures, Krugman wrote in a recent article New York Times editorial. But he did exactly the opposite.
From poor leadership to high youth unemployment, the country faces headwinds from every corner, Krugman said. And the country’s economic stumble is not an isolated case, warns Krugman, and could become everyone’s problem.
Real estate crisis
China’s well-known real estate problems have been the crux of Wall Street’s bearish attitude towards the Asian nation.
The International Monetary Fund said it expects housing demand to increase 50% decline in China over the next decade.
Speaking at the World Economic Forum in Davos last month, International Monetary Fund chief Kristalina Georgieva said China’s real estate sector needed to be “fixed”, while Beijing needed structural reforms to avoid a decline in growth rates.
Meanwhile, prominent hedge fund manager and founder of Dallas-based Hayman Capital, Kyle Bass, said the country’s highly indebted real estate market has triggered a wave of defaults among public developers. This is a problem, given that China’s real estate market can account for up to a fifth of the nation’s GDP.
“This is just like the American financial crisis on steroids,” Bass said, referring to China’s default-gripped real estate market.
“China is going to get a lot worse no matter how much their regulators say, ‘we will protect individuals from harmful short selling,’” he added.
“The basic architecture of the Chinese economy is broken,” Bass continued.
Glimmers of hope
The gloomy picture of China, however, is not shared by everyone.
The Institute of International Finance said Beijing has the political capacity to push China’s economy toward its growth potential and stuck to consensus forecasts for 2024 growth of 5%. recent blog post. This vision, however, depends on sufficient demand-side stimulus. China’s latest GDP data for the final three months of 2023 missed analysts’ estimates, with a figure of 5.2%.
At the same time, Marko Papic, partner and chief strategist at Clocktower Group, has taken an optimistic short-term view towards Chinese stocks. In an interview with CNBC on Feb. 7, Papic said he expects Chinese stocks to rise at least 10% in the coming days as officials signal support efforts to shore up its struggling stock market.
“A 10-15% rally in Chinese stocks is likely in the next few trading days,” Papic said.
JPMorgan Private Bank also outlined bullish scenarios for China in a recent post. “Despite declining stock market sentiment and persistent problems with the real estate market, some segments of the Chinese economy have also demonstrated their resilience,” it said.
The bank said China’s crucial role as a global producer was unlikely to wane, adding that cyclical demand for its exports could remain intact.
Looking ahead, China has obstacles to overcome. However, it remains to be seen whether it will have the firepower necessary to do so.