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The lifting of Covid-19 restrictions in China raised investor confidence as economic recovery looked bright, but recent data suggests China’s recovery may be losing steam. While the outlook for China had improved after Beijing let go of zero-Covid there are other underlying issues that are now plaguing the economy.
China’s growth has already taken a hit after the crackdown on the property and technology sectors, as well as higher scrutiny of private enterprises. Beijing now sees 2023 GDP growth at 5%, a conservative figure compared to the past average of 6%-8%. On the other hand, troubles with the US and a global economic slowdown have impacted business prospects in China.
“Over the next five years we believe that China will average 4% real GDP growth as a decline in the working age population offsets steady expansion in productivity, and aggressive investments into frontier technologies,” as per Homin Lee, Senior Macro Strategist at Lombard Odier. “It would be prudent for investors to assume that at least a modest reversal of China’s global market share is unavoidable.”
China recovery stalling?
Beijing’s effort to drive consumer-centric growth in the Chinese economy has brought the focus on consumption figures. Market participants have been expecting the consumer to drive economic growth, and while there was a rebound in retail sales earlier this year, the growth seems to be slowing.
China’s retail sales rose 18.4% y-o-y in April 2023, but were up only 0.5% compared to March 2023, when retail sales grew 0.8% over the previous month. The y-o-y figures also missed the 21% growth estimate.
“We assert that Chinese consumers will remain cautious and picky as in where and what they are willing to spend. This uneven trajectory has been fueling a skewed recovery that tilts towards selective subsegments…,” says CMB International.
The country’s industrial activity in April grew 5.6% compared to the previous year but was way below forecasts of a 10.6% rise. On the other hand, a report by the country’s Nation Bureau of Statistics (NBS) showed that profits of Chinese industries fell 20.6% between January-April compared to last year. April alone saw profits shrink by 18.2% y-o-y. While overseas demand has already been weak, domestic buyers also seem to be taking a step back.
More recent data shows that the country’s factory activity shrank faster than expected in May due to weak demand. The NBS said the official manufacturing purchasing managers’ index (PMI) fell to a five-month low of 48.8, down from 49.2 in April. A number below the 50 mark represents a contraction in the sector.
Meanwhile, the non-manufacturing PMI for May fell to 54.5 from 56.4, the slowest pace of expansion in four months.
“The PMIs signal China’s recovery remained uneven in May, with manufacturing softening while services still tracked a solid rebound. Given sequentially weaker momentum, more targeted policy support is likely on the horizon as early as June, with a focus on big-ticket consumption, housing, and infrastructure,” said UBS Wealth Management USA.
However, some believe the weak data may not necessarily be bad. “It looks more like China is returning to its longer-term trend where heavy industry continues giving way to services and consumption,’ writes US-based Fisher Investments. “This is right in line with both the normal course of economic development and the government’s ambitions. Officials have long seen export-driven manufacturing as an unreliable economic engine…”
Global economic slowdown weighs
The slowing China recovery is also reflected in the trade data published by the customs department this week, with exports falling 7.5% in May due to trade tensions with the US and slowing global demand.
“In line with our expectation for renewed weakness, exports fell 7.5% y-o-y in USD terms, in part due to unfavourable base effects from a year ago. Exports also declined sequentially on a seasonally adjusted basis. We expect exports will remain subdued, as we anticipate a US recession in H2 while destocking pressures continue to rise,” as per Llyod Chan, Senior Economist at Oxford Economics.
Another concern for investors is the record-high youth unemployment rate, which hit 20.4% in April, as per data from the NBS. The rising unemployment points towards corporates struggling to hire freshers despite a rebound in economic growth.
The weakening China recovery has hit stock markets as well, with the Shanghai Composite Index falling 3.57% in the month of May.
As a result of the uneven recovery, asset managers are now downgrading Chinese equities. Pictet Asset Management, Morgan Stanley and Goldman Sachs have downgraded their outlook for Chinese stocks over the past month.
“We might yet see the economic recovery play out, as anticipated by our economics team. Over the medium to long term, we still see strong potential for Chinese assets. But first Chinese companies have to find more ways of translating GDP growth into earnings growth,” writes the Pictet Asset Management Strategy Unit.
