MCHI - Warning signs flash for China's economy amid deflationary pressure

2023-08-08 06:17:52 ET

2023 was the year that China's economy was supposed to come roaring back following the end of its zero-COVID policies , but all of the indicators are pointing in the opposite direction. Data has shown slowing growth and soaring youth unemployment , and there are many signs that deflation might be a bigger problem than previously imagined. The latest data today showed that Chinese exports suffered their worst fall since the start of the pandemic, while its CPI came in flat in June and producer prices have gone into a tailspin .

What's happening? China exited zero-COVID when rising global inflation had already dented demand for its exports, and compared to the industrialized countries, there wasn't as much excess savings to spend after the reopening. The PBOC has even cut interest rates to encourage consumption, but further stimulus may be challenging given China's big debt problem and the weakness of the yuan. Bubbles in the property market have also led many to reassess their net worth, while an escalating trade war has seen manufacturing from Western multinationals outsourced to other countries like India and Vietnam.

Meanwhile, crackdowns in recent years have left the private sector reeling. The suspension of Ant Group's IPO and the DiDi Global fiasco soured investment, while Beijing has led targeted campaigns against industries like media, education and even food delivery , sapping the confidence of the business community. The Chinese government is trying to repair some of the damage by courting big U.S. industry players - like JPMorgan's Jamie Dimon and Tesla's Elon Musk - but the restrictions on economic activity have prompted many Chinese citizens and companies to save their cash rather than spend or invest.

What to watch: Deflation could beget deflation expectations, which may see demand suffer as consumers hold off on more purchases. Businesses would also make less revenue if they cut prices, meaning fewer jobs and reduced wages, and eventually lower consumption. "Problematic China statistics extend from macro statistics like GDP and unemployment to earnings," notes SA analyst Logan Kane in China's Economic Slowdown: A Wake-Up Call For The U.S. Economy . "Here's what we do know: Investment in China has fallen sharply... there is a huge debt load... and China's population is now falling ."

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