Lackluster inflation and declining trade numbers in China have stoked concerns that the world’s second-largest economy is still on shaky footing, despite recent signs of stabilization.
Consumer prices unexpectedly flatlined in September after rebounding in August, pointing to weak demand and suggesting only a limited effect from Beijing’s recent efforts to put a floor under the economy. Outbound shipments also continued to contract last month, though at a less steep pace than August, according to official data released Friday.
Despite signs in recent weeks that China’s economy might be perking up after a summer slowdown, the latest batch of data serves as a note of caution about the outlook for an economy that remains buffeted by a range of powerful headwinds.
A drawn-out property crisis continues to ripple through the economy, with the rising prospect of default by a major Chinese developer triggering a fresh round of jitters among global investors. A long-hoped-for revival in consumer spending after the lifting of three years of Covid-19 restrictions has proven ephemeral. Exports, meanwhile, are expected to drag on growth through the remainder of the year, as overseas demand for Chinese-made goods cools.
The fresh concerns around China’s near-term outlook in recent weeks have dimmed hopes for a turnaround of the global economy, particularly as higher interest rates pursued by central banks in the U.S. and Europe curb consumers’ and companies’ willingness to spend and invest.
The International Monetary Fund this week lowered its forecast for Chinese growth this year and next to 5% and 4.2%, respectively, from earlier predictions in July of 5.2% and 4.4% growth. The cut in expectations for China also prompted the IMF to lower its global growth forecast to 2.9% for 2024, from 3%.
Some economists say the pain might not become fully apparent until later. Tommy Xie, head of China research at OCBC in Singapore, expects China’s economy to hit Beijing’s official growth target of around 5% for the year, even without large-scale stimulus.
“China’s economy will most likely rebound further in coming months,” Xie said. “But the real challenge will come next year and the year after.”
Part of the challenge will be fending off a deflationary spiral, a pernicious condition where lower prices and weak demand reinforce one another.
The specter of such a deflationary spiral was raised earlier this summer, when headline consumer prices fell into deflation for the first time in more than two years in July.
On Friday, official data from China’s National Bureau of Statistics showed consumer inflation staying flat in September compared with a year earlier, after inching up 0.1% in year-over-year terms in August. Economists polled by The Wall Street Journal had expected consumer prices to increase 0.2%.
Some economists are sanguine that deflationary pressures will dissipate over time. A gauge of core inflation, which strips out volatile energy and food prices, held at a six-month high of 0.8% in September.
That suggests weak domestic demand isn’t entirely responsible for the low inflation rate, economists at Capital Economics told clients on Friday. Instead, the research firm blamed the slack in prices on excess inventory that was generated by China’s pandemic-era boom in factory production.
Prices charged by manufacturers fell 2.5% in September from a year earlier, easing from August’s year-over-year decline of 3%. The difference was partly attributable to higher crude oil prices, Goldman Sachs economists wrote. Unlike consumer prices, factory-gate deflation has persisted for nearly a year as Chinese demand for metals, chemicals and energy has been undercut by the continuing real-estate downturn.
Monthly trade figures released on Friday, meanwhile, offered some evidence that China’s economy may be starting to bottom out.
Outbound goods shipments from China to the rest of the world fell by 6.2% in September from a year earlier, narrowing from the 8.8% contraction in August, according to data from China’s customs bureau. Imports also dropped 6.2% year-over-year in September, less than August’s 7.5% decline.
A surprisingly resilient U.S. economy helped cushion the slowdown in overseas demand for Chinese-made goods, said OCBC’s Xie.
Still, as Western consumers shift spending to services and away from goods, exports are expected to drag on overall growth this year—a contrast to the Covid years, when exports served as a rare pillar of growth.
Friday’s data releases come as economists debate whether China’s summer slowdown is now fully in the rearview mirror. In recent weeks, economic readings have shown some signs of stabilization.
An official gauge of manufacturing activity expanded in September for the first time since March. And early this month, travelers made more domestic trips during the eight-day National Day holiday than they did in the last prepandemic year of 2019, though the increase was less than expected.
China is set to release a spate of economic indicators on Wednesday next week, including third-quarter gross domestic product.
As the recent run of less-grim data has rolled in, some investment banks have cautiously raised growth forecasts for the quarter.
On Thursday, Citi economists raised their forecast for China’s third-quarter growth to 4.3%, putting the economy back on track to hit the year’s growth target of around 5%. Nomura recently raised its full-year GDP forecast for China to 4.8%, from 4.6%.
Analysts credit a recent flurry of easing measures from Beijing for the improved sentiment. The central bank has trimmed interest rates several times this year, while local governments have sped up their issuance of bonds used to fund infrastructure projects.
To address the housing crisis, officials in more cities have scrapped restrictions on home purchases. In some cases, they have begun to allow developers to offer larger discounts in a bid to unload their inventories of unsold apartment units.
Still, economists have generally dismissed these measures as being too piecemeal in nature to effect a durable revival in confidence—the key missing ingredient in the recovery, many say.
One imminent risk stems from the embattled real-estate sector. Country Garden, one of China’s largest property developers, failed to repay a $60 million loan and said this week that it is likely to default on nearly $190 billion in debt.
Beijing has also done little to address structural headwinds such as a population that is rapidly skewing older as well as slowing productivity growth that will weigh on China’s long-term growth potential, economists say.
“The recovery momentum hasn’t been as strong as expected postpandemic,” said Shuang Ding, chief China economist at Standard Chartered Bank. “We see little sign that confidence will change for the better.”
Source: WSJ.com October 14, 2023 | By Stella Yifa Xie