China’s sole engine driving growth is losing steam.
When Beijing quietly ended the “zero-COVID” policy near the end of 2022, many expected China’s economy to rebound swiftly. More than a year and a half later, however, China continues to see lackluster recovery while the problems dragging down the economy like the real estate sector crisis have worsened.
China’s economic struggles are most noticeable whenever the Chinese Communist Party authorities release data on key indicators like exports and manufacturing activity. The recent weak economic figures suggest that the actual situation is more pessimistic given the CCP’s tendency to “massage” data to make them look better.
The bleakness of the economic situation is also hinted at by the central bank’s rate cuts, continued property sector woes, and, indirectly in Beijing’s own propaganda.
Worrisome data
Exports, investment, and consumption are the “troika” driving China’s growth. But with domestic demand and investment failing to pick up after the pandemic, the Chinese economy is increasingly gliding on a single “engine.”
That “engine,” however, is losing steam. The General Administration of Customs of China released data in August showing that exports increased by 7.0 percent in July 2024, or slower than the 8.6 percent rise in June and lower than forecasts of 9.7 percent. When compared with official data from 2022, exports in July 2024 actually decreased by 9.7 percent.
China’s exports are likely to come under greater pressure in considering the latest manufacturing activity data. China’s manufacturing purchasing managers’ index (PMI) for July stood at 49.4 in July, down from 49.5 in June. China’s PMI has been in the contraction zone for all months in the year so far with the exception of March and April. Reduced manufacturing activity means fewer exports and even weaker economic growth.
While China’s weak official data has raised alarm bells about the state of the economy, Beijing continues to claim that it is on track to meet its growth target for the year. For instance, the National Bureau of Statistics released data in July indicating that China’s GDP for the first half of 2024 went up by 5.0 percent from a year ago, or on par with the targeted “about 5 percent” announced at the Two Sessions in March. However, in estimating China’s actual GDP growth using a method adopted internally by the CCP authorities, we assessed that China only saw 2.4 percent growth in H1 2024.
Assuming current trends hold, China is unlikely to achieve the Party’s growth target at the end of the year. Beijing, however, will almost certainly manipulate the official data to ensure that the target is met. Blatant attempts at data “adjustments” are likely to backfire as observers increasingly sense that the official figures are too detached from reality. Investors and institutions that put much store in official data are also setting themselves up for underperformance.
Rate cuts
Another sign that the Chinese economy is not doing well is the People’s Bank of China’s (PBoC) flurry of rate cuts ahead of the U.S. Federal Reserve’s move.
On July 22, the central bank announced that it would cut the seven-day reverse repo rate to 1.7 percent from 1.8 percent and that it would improve the mechanism of open market operations. On the same day, the PBoC authorized the National Interbank Funding Center to lower the one-year loan prime rate to 3.35 percent from 3.45 percent and the five-year LPR to 3.85 percent from 3.95 percent.
On July 25, the PBoC cut the one-year medium-term lending facility (MLF) to 2.3 percent from 2.5 percent. In a statement, the central bank said it sold 200 billion yuan of one-year loans under its MLF at 2.3 percent.
We believe that the rate cuts were an attempt by the CCP authorities to reduce the immense downward pressure on the economy and stay the triggering of financial risks that are being exacerbated by the bursting of the real estate bubble. Beijing would be hoping that the rate cuts would help to stimulate the economy and counteract the market negativity stemming from the CCP’s doubling down on authoritarianism and failure to introduce liberal reforms at the Third Plenum.
Real estate
The central bank’s moves are likely to see limited effectiveness given the worsening and virtually unsolvable property sector crisis.
On Aug. 1, China Index Academy issued a one hundred cities price index report for July. The report noted that the average price of second-hand residential properties in the cities that it tracked had declined by 6.58 percent year-on-year and dropped 0.74 percent month-on-month to 14,653 yuan per square meter. July was the 27th month of consecutive month-on-month declines in the average price of second-hand homes. While the report noted that the average price of new homes increased by 1.64 percent year-on-year, we believe that this rise is structural and does not represent an overall recovery in real estate prices on the whole.
On the same day, mainland media reported that several cities, including Zhengzhou, Shenyang, and Ningde, no longer implement new home sales price guidance and have effectively removed price caps. Also, cities such as Yangjiang, Zhuhai, and Wuhu are optimizing their price cap policies, including shortening the interval for adjusting record prices and eliminating floor price differences. We believe that lifting price caps on new homes in cities foreshadows the continued fall of property prices and the perpetuation of vicious cycles of financial risks.
On Aug. 2, Bloomberg reported that the PRC authorities had rejected a proposal by the International Monetary Fund to use central government funds to complete unfinished housing. In an annual review of China’s economy, the IMF urged the PRC to deploy “one-off” fiscal resources to finish and deliver pre-sold properties or compensate homebuyers. The IMF put the cost of doing so at about 5.5 percent of the GDP over four years. Bloomberg calculated that this would amount to nearly $1 trillion based on China’s GDP in 2023.
We believe that the IMF’s proposal that the PRC central government spend massive funds to complete unfinished housing underscores the severity of the real estate sector crisis. The CCP authorities’ response to the plan indicates that they likely do not have the funds to foot the bill for unfinished housing or come up with workable solutions to save the real estate sector.
Propaganda
Finally, the CCP’s propaganda about the economy signals that all is not well despite official assurances.
For instance, in a symposium at Zhongnanhai on July 26 with non-Party members to discuss the current economic situation in China, Xi Jinping said that the current difficulties and problems facing China’s economic development are “completely manageable.” He also called for “firm confidence in development, strategic resolve, and proactive responses to problems and challenges,” and advocated the promotion of a positive narrative about China’s economic prospects.
The more the CCP attempts to promote or cover up something, the more likely that problems in that area are particularly severe. Xi’s remarks at the July 26 symposium and other official economic propaganda indicate that China’s economy is in serious trouble. Businesses, investors, and governments are advised to see through the propaganda and make appropriate adjustments.
