The Strategist

Diagnosing the Chinese growth slump

China’s economy faces multiple challenges ranging from problems in the housing and banking sectors, in addition to overall economic performance. Actions taken by the authorities range from traditional monetary easing to macroprudential measures, including adjustments to mortgage and deposit rates for homeowners as well as banks' reserve requirements at the central bank. However, the fiscal and monetary policy responses have been met with scepticism so far by financial markets, creating uncertainty in the near-term market directions.

Dr. Wolfgang von Hessling, Chief Economist EMEA
Temps de lecture
10 minutes
Strategist China
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The Chinese economy continues to make headlines as broad economic activity has continued to slow down since the second quarter of 2023, with all major drivers - investment, consumption and export - weakening at the same time. While the first quarter of 2023 still left some room for hopes of a rebound, published economic data since April proves them elusive. The degree of investor disappointment is evident across all Chinese asset classes, with Chinese equities down 5% since April, underperforming global equities which have rallied around 7%. Unsurprisingly, the Chinese yuan has also given in, losing 5% against the US dollar. Additionally, government bond yields retrenched 25 basis points to lows last seen during the Covid-19 crash when the growth and inflation outlook began to darken sharply. The list of growth challenges ranges from a structurally struggling real estate sector, a strained shadow banking system, financially shaky local government enterprises (LGFV), a weak domestic consumption, slowing labour markets, as well as sluggish foreign trade dynamics and weak investment inflows. As a result, China is experiencing a deflationary episode, with five consecutive month-on-month negative CPI readings in the first semester of 2023. With an average monthly rate of 0.1% over the past year, far below the longer-term monthly growth rate of 0.6% observed over the past ten years, sluggish retail sales are adding to the list of headwinds the economy is facing. 

Trying to tackle China’s dual problem of weak growth and persistent deflation

So far, the public response to the economic weakness has been rather moderate, disappointing investors who had hoped for more decisive moves. Actions have ranged from traditional monetary policy easing to macroprudential measures. Firstly, regulators urged banks to lower interest rates on new mortgage offerings and to allow room for renegotiations of mortgage rates in an attempt to reduce interest costs for real estate investors. Secondly, minimum down payments for first- and second-time home buyers were reduced to 20% and 30% respectively, from the previous minimum of 30% to 40%, in a bid to ease the ailing property market and to improve investor sentiment. And thirdly, the People’s Bank of China cut the amount of foreign exchange reserves that banks must hold from 6% to 4% of their foreign exchange deposits in an attempt to stabilise the faltering yuan exchange rates. 

Policy action not enough to address broad-based weakness

While these measures address several aspects of China’s economic slowdown simultaneously, they have failed so far to restore confidence in the upward trajectory of the Chinese economy. A lack of clarity when it comes to the situation of overleveraged property developers and higher expectations of monetary easing and fiscal support are keeping investors on the sideline for the time being.

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