Doubts are beginning to rise over whether the Chinese economy will be able to meet its official 5 percent growth target for this year as factory activity continues to fall.
August saw its fourth consecutive monthly contraction as the National Bureau of Statistics (NBS) purchasing managers’ index (PMI) fell to 49.1 from 49.4 (below 50 indicates a contraction). The August result was below expectations, with Bloomberg forecasting 49.5.
The latest figures were not a unique or even recent phenomenon, but part of a longer trend. The reading was below 50 for all but three months through April 2023. There was a small increase after China lifted its COVID-related restrictions in late 2022 – at the cost of at least one million deaths – but it has been very downhill since then.
Other data showed that below headline inflation, deflationary pressures were at work. According to analysis by Goldman Sachs economists, both entry and exit price sub-indices fell. “Price indicators from the NBS manufacturing survey suggest that deflationary pressures have increased significantly,” they said.
The worsening situation in the manufacturing industry is compounded by the decline in the property and real estate sector, which has been a mainstay of the Chinese economy for more than a decade.
According to preliminary data from China Real Estate Information Corp, reported by Bloomberg, the value of new home sales in August from the 100 largest real estate companies fell 26.8 percent from a year earlier, compared with a decline of 19.7% in July.
The downturn in the real estate market has a significant effect on local government budgets. Goldman Sachs economists have warned that tax revenues and land sales will fall short of expectations unless there is significant intervention from government authorities. But there is little sign of this happening with the measures taken so far described as insufficient.
The Wall Street Journal reported that the “unfolding crisis” in real estate, now in its third year, “has not yet bottomed out and remains a major headache” despite some rescue efforts.
The worsening economic outlook has led to a number of forecasts that China will miss its 5% growth target this year unless there is major government intervention.
Bloomberg economists said: “Looking forward, the economy will need more policy support to pull out of the prolonged period of weakness. Two months of weak PMI readings so far this quarter, including the latest surprise downgrade in the manufacturing gauge, bode badly for the economy.”
An analysis by Goldman Sachs stated that “more fiscal easing is needed to help secure the ‘around 5%’ growth target for the year to come.”
Economists at Swiss Bank UBS predicted the economy would grow by 4.6% this year and 4% in 2025. This compares with previous forecasts of 4.9% and 4.6% respectively.
Economists at Barclays Bank took a slightly different approach, examining tax revenue collections, which they believe provide a more accurate assessment of the state of the economy than growth figures. Their conclusion is that the situation could be worse than the growth figures indicate.
According to their findings, reported in Wall Street Journalcorporate income tax revenue fell 5.4 percent in the first seven months of the year, with the decline reflected in a drop in profit margins for companies.
“With falling domestic demand exacerbating overcapacity issues, price wars or price cuts are becoming more prevalent across industries” amid “fierce competition.”
“Falling profits will likely lead to lower wages and layoffs, boding ill for consumption,” they said.
These darker views are countered by government officials. In a video message, Chinese Finance Minister Lan Fo’an emphasized that the government is very much in control.
“Looking forward, China’s economic development has multiple advantages and macro control policies will continue,” he said, describing the economy’s performance in the first half of the year as “generally stable and making steady progress.”
Lan was speaking from Cape Town, South Africa, where he was attending a meeting to establish a new development bank sponsored by the BRICS group of countries.
There is no doubt that the actions of the Chinese state can play a powerful role in determining the direction of the economy. But the objective laws and contradictions of the global capitalist economy are even stronger and are beginning to make themselves felt.
The government is unable to resort to major stimulus measures as in the past because it fears that this will only create a debt crisis and destabilize the financial system. There are already concerns in this area.
China’s slowing economy and lack of profitable investment opportunities have already led to a shift to government bonds, pushing up their price and sending their yields, or interest rates, down. (The two have an inverse relationship.)
The People’s Bank of China is trying to stop these moves due to fears of a bond market bubble that could burst as more government debt is issued. This would lower the price of bonds, raising their yields, which would mean that banks, which have invested heavily in government debt, would suffer significant losses.
The worry is that such banks could be placed in a situation similar to that of the US Silicon Valley bank, which collapsed in March 2023 as a result of significant losses on its treasury bonds.
The Chinese government’s overall plan is to try to expand its way out of the slowdown by increasing exports through the development of high-tech products and basic industrial goods, particularly steel. But they face rising tariff walls and protectionist measures.
Protectionism is sure to intensify amid a slower global economy, including in the US.
Then there is the question of what policies will be enacted to specifically target China by whoever wins the US presidential election. Trump has said he will raise tariffs on all imports from China by 60 percent, while Harris’ policies will show no slowing of the anti-China measures enacted under Biden.
The continued slowdown, as exemplified in the latest data, has led to a widespread view that the 5% growth target is not being met. These were summed up by Wang Yan, a strategist at global investment firm Alpine Macro, who said it was “almost impossible” to achieve.
Wang commented that Chinese policymakers appeared to be “paralyzed” and lacked a coherent strategy with the piecemeal measures they have used so far, being ad hoc and hesitant. He warned of a “slow implosion” in the period ahead.
The great fear of the ruling Chinese oligarchy, if such a development takes place, then it could lead to an explosion of class and social struggles. The political stability of the regime was largely based on its ability to provide economic expansion and jobs.
#latest #economic #data #casts #doubt #Chinas #growth #target