Several metrics suggest that China is in a recession and experiencing deflation.
The Chinese Communist Party is notorious for manipulating its official figures to make China’s economy look as though it was performing better than in reality. As the economy started noticeably cooling in the 2010s and especially after the Sino-U.S. trade war began in 2018, Beijing found itself having to “adjust” its data to obscure economic deterioration rather than pad economic achievements.
As in years past, the CCP has almost certainly doctored China’s official economic data in 2023. Yet even the revised numbers show that the regime is struggling with its post-pandemic economic recovery.
Second quarter figures
Economic data released by the PRC’s National Bureau of Statistics (NBS) on July 17 claimed 6.3-percent growth in the second quarter of 2023—lower than the 6.8 percent as expected by Chinese data provider Wind and the Reuters analysts’ poll forecast of 7.2 percent. The quarter-on-quarter growth rate of 0.8 percent was higher than the 0.5 percent expected, but was substantially weaker than the 2.2 percent quarter-on-quarter expansion in the January to March period.
China’s second-quarter GDP is less impressive than the figure indicates due to the low-base effect from 2022, when Shanghai and other large Chinese cities were locked down for an extended period.
The NBS’s July 17 data dump contained more troubling figures.
Youth unemployment in China rose again, with joblessness among those aged 16 to 24 growing to 21.3 percent in June, up from 20.8 percent in May.
Retail sales in June rose 3.1 percent, compared with the 12.7 percent surge in May. Household deposits also went up by nearly 18 percent in the first half of 2023 to a decade high, a sign of widespread pessimism in China about property sector recovery, uncertain job prospects, and the poor state of the economy in general.
Investment in fixed assets in the first six months of 2023 grew just 3.8 percent year-on-year, down from a 4-percent rise in the first five months of the year. Fixed assets investment also only rose 0.4 percent in June as compared to May, while industrial production expanded 0.7 percent over the same period.
Private investment fell 0.2 percent in the January-June period from a year ago, down from a drop of 0.1 percent in the January-May period. Property investment declined by 7.9 percent in the first half of 2023, down further from a 7.2 percent drop in the first five months of the year.
Meanwhile, China’s exports in June fell 12.4 percent year-on-year in dollar terms to $285.32 billion, the biggest decline since February 2020. Economists polled by Reuters had only expected declines to 9.5 percent. Imports decreased by 6.8 percent year-on-year in June to $214.70 billion, while the trade surplus in June came in weaker than market expectations across the board at $70.62 billion.
Finally, new home prices were flat in June from a year ago as compared to a 0.1 percent gain in May, according to NBS data released on July 15. The real estate sector accounts for about a quarter of the economic activity in China.
“The Chinese economy is clearly sputtering,” Eswar Prasad, professor of trade policy and economics at Cornell University, told The Wall Street Journal. “China’s recovery is going from bad to worse … Increasingly, 2023 is looking like a year to forget for China,” Harry Murphy Cruise, an economist at Moody’s Analytics, said in a research note.
Wall Street banks adjusted their China annual growth forecast in light of the second quarter figures. J.P. Morgan cut its forecast from 5.5 percent to 5 percent, while Morgan Stanley revised its forecast to 5 percent from 5.7 percent.
Recession and deflation
Other metrics suggest that China is in a recession and experiencing deflation.
China’s consumer price index (CPI) in June as announced by the NBS on July 10 was unchanged from a year earlier. This is compared with 0.2 percent growth in May and represented five consecutive months of month-on-month decline. Meanwhile, the producer price index (PPI) fell by 5.4 percent in June year-on-year and 0.8 percent month-on-month, or nine consecutive months of month-on-month drops. Falling factory-gate prices and consumer prices signal deflation.
While China’s economy is not in a recession as typically defined (two successive quarters of negative growth), some economists have argued that the country has at least entered into a “balance-sheet recession” whereby businesses and households shift more of their income toward paying down debt instead of consuming and investing. Heavy debts and low confidence trap the economy in weak growth and the authorities find it difficult to stimulate the economy with interest rate cuts because few want to borrow.
Richard Koo, chief economist at the Nomura Research Institute and originator of the “balance-sheet recession” concept, noted that “people are no longer borrowing money” in China over concerns about asset prices and economic growth prospects, and are instead “trying to reduce their debt.”
Investor pessimism
Beijing has few good options for rescuing the economy. Cutting interest rates further would do little to help if China is in a “balance-sheet recession,” and could instead worsen matters by widening the spread between the U.S. and Chinese 10-year Treasuries and accelerating capital outflows from the mainland.
Neither can removing property sector restrictions such as the “three red lines” do much to stimulate the economy owing to the Chinese people’s concerns over deflation and employment. And while currency depreciation benefits Chinese exports in theory, faltering global demand as recessionary pressures rise in Europe, the United States, and other countries means China will not gain much from a weaker renminbi. Meanwhile, the CCP also has to deal with supply chains leaving the mainland and countries stepping up “de-risking” from China.
The Xi Jinping leadership has promoted the “strong confidence” concept and has taken steps to restore business confidence like ending the crackdown of fintech companies and pledging support for the platform economy. However, backing the service sector will not do much to spur economic growth when demand is already low. The CCP’s increasingly authoritarian efforts to control Chinese society and draconian legislation like the updated anti-espionage law have also greatly eroded domestic and foreign confidence in doing business in China.
Foreigners are curbing their investment in China. A July 13 report by The Wall Street Journal noted that foreign direct investment in China dropped to $20 billion in the first quarter of 2023 as compared with $100 billion over the same period in 2022, citing an analysis of government figures by Rhodium Group analyst Mark Witzke. Economists at Goldman Sachs predicted that outflows from China in 2023 will cancel out investments entering the country, an astonishing change given more money has been going into China than leaving over the past forty years. Goldman also downgraded the ratings of some major Chinese banks to “sell” in a July 5 report, a move which underscores foreign pessimism about China’s economic and financial situation.
China’s economic straits could trigger serious social and political problems for the CCP. Businesses, investors, and governments should be alert to potential “Black Swan” events in the second half of 2023.
