Interview, Earnings Call
Why China’s economy is struggling
- Revised Growth Outlook: Goldman Sachs has downgraded its 2024 China GDP growth forecast to 4.7%, missing the government's official target of approximately 5%.
- This revision reflects a shift from the upbeat sentiment observed in May 2024, when Q1 growth of 5.3% and initial property easing policies sparked optimism.
- Key Economic Drivers of the Slowdown:
- Property Sector Performance: While land sales and housing starts (declining ~70% from the 2021 peak) may be bottoming, total floor space under construction remains far from stabilization, having only declined ~20% and indicating a multi-year oversupply correction.
- Consumption Weakness: Retail sales growth decelerated significantly to 2% year-over-year in August, driven by negative income effects from the property downturn and job losses/salary cuts in the financial sector.
- Exports: Exports remain a resilience factor with volume rising 15% year-over-year, though this is increasingly seen as a temporary offset to domestic weakness rather than a structural solution.
- Policy Constraints and Strategy:
- Reluctance to Devalue Housing: Policymakers are proceeding cautiously with easing measures due to fears that a rapid price recovery would undo previous deleveraging efforts and create asset bubbles in top-tier cities.
- Targeting Homeowners Over Developers: Government strategy prioritizes supporting individual buyers rather than bailing out developers, a stance that complicates the resolution of supply-side imbalances.
- Fiscal Space: Despite a combined government debt-to-GDP ratio exceeding 100%, officials retain capacity to leverage central government debt further to 110–120% to fund stimulus if necessary.
- Downside Risks and Geopolitical Scenarios:
- Tariff Impact Simulation: A potential 60% U.S. tariff on Chinese goods (based on 2018–2019 trade war extrapolation) could reduce Chinese growth by approximately 2 percentage points and drive the RMB to depreciate beyond 8 to the USD.
- Uncertainty Channel: Similar to the 2018–2019 period, a new trade war would impact growth less through direct trade volumes and more through corporate capital expenditure (capex) hesitation across both export-linked and non-linked firms.
- Global Implications:
- Scenario A (Domestic Slowdown): A housing/consumption-driven slowdown would negatively impact commodity imports (e.g., iron ore from Australia/Brazil) and luxury goods demand from Europe.
- Scenario B (Trade War): A tariff-driven slowdown could lead to higher global inflation, a stronger US dollar, and accelerated global supply chain reallocation, potentially benefiting non-Chinese manufacturing hubs.
- Forward-Looking Policy Reaction:
- Goldman Sachs predicts that in the event of a severe tariff-induced shock comparable to 2018–2019, the Chinese government would likely abandon caution and implement large-scale fiscal stimulus combined with further monetary easing to cushion job losses and growth impacts.
- Capital flows are expected to shift away from China toward other jurisdictions as investors reassess portfolio allocations in a high-tariff environment.