Interview, Earnings Call
Why China’s economy is struggling
- The Chinese economy is projected to struggle with a real estate downturn, slowing consumer spending, and geopolitical tensions, with growth expected to fall short of the official 5% target, potentially reaching 4.7% as of this year.
- Economic activity is anticipated to slow considerably from May to September, driven by property sales starts facing a 20% year-on-year decline and retail sales remaining weak with a reported 2% increase in August.
- The property sector indicates that while land sales and housing starts may be near their bottom after a 70% drop from the 2021 peak, total under construction, floor space, and construction activity have only declined 20% and are not yet at their lowest point.
- Property prices are expected to continue declining sequentially, creating a negative feedback loop involving household balance sheet deterioration and local government debt that is forecast to play out over a few more years.
- Near-term economic performance is expected to be weighed down by the property decline affecting income and wages, alongside a potential increase in financial sector layoffs and salary cuts.
- Government policy is expected to proceed cautiously and incrementally to avoid validating housing deleveraging efforts, with explicit plans not to use state funds to bail out developers, while demand-side easing remains more challenging than financing-side measures.
- Chinese exports are expected to grow approximately 15% year-on-year from a high level, maintaining strength due to quality and cost competitiveness even within a resilient but slowing global growth environment.
- A trade surplus of Chinese goods is expected to eventually hit a wall, making it difficult to sustain current high global market shares as the impact of potential U.S. tariffs, such as 60% levies, could reduce Chinese growth by two percentage points and depreciate the RMB to above 8 USDCNY.
- In the event of significant trade tensions, the Chinese government is expected to introduce large fiscal stimulus and monetary easing, potentially increasing the central government debt-to-GDP ratio from over 100% to 110% or 120% due to available leverage space.
- Global impacts of a Chinese slowdown will vary by cause; if driven by domestic factors, iron ore imports from Australia and Brazil and European luxury purchases are expected to decline, whereas a trade war scenario could lead to slower global growth, higher global inflation, and a stronger dollar.
- Global investors are expected to reconsider capital allocation, potentially moving portfolio flows away from China, while supply chain rearrangements may cause heterogeneous outcomes across countries.
- While weak housing is projected to eventually benefit consumption by reducing the need for large down payments, the near-term outlook involves further softening of consumption due to the combined effects of the property decline and financial sector job losses.