China’s data is encouraging but the economy is still not recovering

There are signs that China’s economy and financial markets may be in a tailspin following the sharp decline, but these events may not yet be enough to stabilize China’s economy.

key takeaways

• Many signs indicate that China’s economy may be improving.
• The bigger problems of declining affordability, tight wages and rising costs are being ignored.
• A comprehensive policy reform may be the only way to fix China’s economy.

In recent weeks, China has faced deflation, a record-low yuan and falling prices fueled by rising debt in its property sector. This has led some economists and analysts to say that the country is in for a tough ride.

However, China has taken steps to deal with its weakening economy. China cut by a third the amount of foreign currency deposits required to be held by its financial institutions and launched a series of stimulus measures to boost its sagging residential property market. The country’s credit demand is improving, deflationary pressures are easing and the yuan is strengthening.

However, some market observers believe these actions may not be enough to keep the global economic giant out of recession.

Major concerns must be addressed

“While the improved data may make a bullish argument for some investors, they do not address an overall concern: declining affordability due to low wages and rising costs. Without addressing the latter, frequent interventions to keep these statistics moving will become the norm,” Sandeep Rao, head of research at Leveraged Shares, said in an email.

Rao said addressing declining affordability would address significant problems for the Chinese economy. However, the government is probably not keen to intervene in that area.

China’s central bank cut lending prime rates (LPR) in June to boost lending and rediscount quotas by about $28 billion, especially to help small businesses and farms. In July, the Chinese government introduced several measures to boost consumption of goods and services, such as tax breaks for small businesses and households.

Bond sales were accelerated in August to boost lending, resulting in a larger-than-expected credit expansion. Recent efforts to boost the real estate market may increase domestic demand for mortgages. Corporate loans have also increased.

impact on usa

The slowing economy in China could impact the already uncertain US economy which is well on its way to recovery.

As signs were pointing to a slowdown in China’s economy last year, Macropol Fellow Hou Song, who leads the think tank’s work on the Chinese economy, pointed out that China’s last significant recession in the U.S. stock market was in 2015. Had an impact. Song said the effects of the slowdown in China could prompt investors to sell stocks they consider risky.

If China’s economy worsens, there could also be potential impacts on US trade and consumption. However, Rao feels that the significance of the current slowdown on US trade may be kept minimal.

“China is a feeder of US consumption and the US is a major supplier of energy and mineral resources to China,” Rao said. “Wide impact on US exports.”

Is recovery possible for China?

Some analysts say that the path of reform will not be easy for China.

Morgan Stanley revised its outlook for the country to 4.7% for 2023, down about 18% from its mid-year forecast.

“Over the summer, data has pointed to a faster-than-expected deterioration in (China’s) micro environment,” Morgan Stanley’s Vishi Tirupattur said on the Thoughts on the Market podcast on Sept. 12. “We have seen consistent and incremental asset and infrastructure growth.” Measures have been eased but market confidence has not returned and debate is growing over the impact on earnings, global growth and the impact on commodities.

Rao said, ever since China announced its open door policy, its government has focused on development at all costs. To maintain dominance, it had to produce goods at a lower price than anyone else. As a result, incomes increased, but wages were limited due to cost competitiveness.

As incomes increased, real estate became a preferred investment method, contributing to the growth of the Chinese economy. However, this pillar is under considerable pressure due to increasing supply and declining demand due to affordability, quality and valuation concerns.

“There will be no quick solution to this; Instead, there will be a series of stop-gap measures to iteratively increase the figures,” Rao said. “China’s wavering fortunes come amid a backdrop of improving economic data in India, ASEAN, Latin America, Central Europe and parts of Africa. For investors, there are plenty of options for global diversification outside China.”

Source: www.investopedia.com