China's Economic Recovery Stumbles: Manufacturing Woes, Youth Unemployment, and Structural Concerns Cast Shadows on the Giant's Growth Prospects.
Source: CoinDesk
Overview
Talk of China’s economic recovery has been very prevalent in the media for much of 2023. After a year marked by tense geopolitical factors and a tough macroeconomic environment, the prospect of China’s reopening to the rest of the world seemed like the perfect catalyst for a global economic recovery. After all, China is the world’s second-largest overall importer and first exporter, and its large domestic market provides countless opportunities for businesses to sell their products and services.
However, 6 months into 2023, China’s expected economic recovery hasn’t picked up as much as initially thought, something that has raised economists’ concerns regarding the economic future of the country. Disappointing manufacturing data, lagging export figures, and rising youth unemployment levels have impaired the country’s much-awaited return to the macroeconomic game board.
With the country declaring the end of its implacable Zero Covid policy in April, Chinese citizens celebrated their long-awaited freedom by splurging on all kinds of high-end spending, such as luxury clothing and air travel.
The picture that was forming in the aftermath of China’s reopening to the world was very positive, even giving developed nations a reason to look forward to the country’s impending recovery as a means to give their own economy a boost.
China’s sluggish recovery
Fast forward to the middle of 2023 and China’s sluggish manufacturing data along with concerning youth unemployment figures have left economists revisiting their predictions for the giant’s growth for the rest of this year and for years to come. As soon as China abandoned its unwavering Zero covid policy that had dragged on consumer spending since the onset of the pandemic, prospects were very positive for the country’s consumption figures, as citizens splurged on travel and discretionary spending. This contributed to retail sales making up a greater amount of total GDP than investments, something the country has long been pushing for in its effort to transition to a consumption-driven economy.
However positive this initial outlook seemed, underlying and structural issues resurfaced to remind the world that China’s dominating era of rapid growth is likely over. First of all, the property boom that saw China’s asset bubble hit levels unseen even during the US residential real estate bubble in the early 2000s has now ended.
Secondly, a number of Chinese local governments have reached crippling debt figures, which comes at the risk of major cities having to cut spending and delay investments for years to come, a prospect that is not too kind for an economy that has been relying on government overinvestment for over a decade.
Further, Chinese President Xi Jinping’s increasing crackdown on technology companies paired with the country’s wavering relations with the West have economists hinting that a number of structural issues will significantly hinder the country’s chances of continuing to grow at the astonishing pace they had been for years.
Source: International Monetary Fund
According to the International Monetary Fund, what had become a customary pace of yearly GDP growth of between 6% and 8% will have to be revised downwards toward a more moderate 3% to 4% yearly economic growth, significantly hindering China’s goal of surpassing the U.S. as the world’s largest economy.
Youth unemployment figures (defined as those aged 16 and 24 who are looking for a job but cannot find one) hit an all-time high of 20.8% in May. This bleak picture for the young future members of the Chinese workforce is likely to get even worse this summer when an estimated record 11.6 million college students start looking for a job after graduation.
Pressed by this stark economic outlook, last week the country’s central bank officials decided to cut two key lending rates in an attempt to spur the economy. In this way, the People’s Bank of China announced last Thursday that they would cut the interest rate on seven-day reverse repurchase operations from 2% to 1.9%. The central bank then also announced it had cut rates on loans available through an emerging lending facility for commercial banks at all of its maturities. These actions appear to be only the beginning of a new shift toward an easing monetary policy, as they show that both government and central bank officials are becoming increasingly worried the country’s recovery will taper off.
It’s important to mention that although the economic outlook for China is a lot bleaker than it was just a few months ago, most economists don’t expect these issues to end up leading the country into a recession or even missing the growth target of 5% it had previously established. The main thing to look out for is whether China can pull through and continue its transition to an economy where domestic consumption makes up a bigger part of the country’s overall economy (domestic consumption currently represents merely 38% of the annual gross domestic product, compared with 68% in the U.S.).
Source: The World Bank
General Sources: Wall Street Journal, The Economist, Financial Times, Diario Expansión
Written by: Alfonso Sepúlveda, Lead Portofolio Manager at Sora Capital A.C.
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