Understanding China's Troubled Economy in Five Charts
China has problems: economic, social, and geopolitical. There’s such an impressive range of issues that it can be challenging to keep track of them all.
The world’s second-largest economy, by far the largest exporter, and home to 1.4 billion people, China is critical to the global economy. It is the top trading partner for 120 countries.
Whether or not you’re investing directly in China, there’s a possibility that what happens there will reverberate in your clients’ portfolios.
Here’s where things stand today:
A debt-fueled overbuilding of real estate has led to a prolonged property market downturn. The warning signal was Evergrande (formerly the second largest real estate company in China) defaulting on its debt in late 2021. Since then, housing projects have stalled and homebuyers, who often make substantial downpayments, have protested unfinished developments in hundreds of cities. The health of the real estate market is particularly impactful to China’s economy as the property industry traditionally made up as much as 30% of the country’s gross domestic product (GDP). It will be challenging for China’s economy to do well while the property market is suffering.
The health of the real estate market is particularly impactful to China’s economy as the property industry traditionally made up as much as 30% of the country’s gross domestic product (GDP). It will be challenging for China’s economy to do well while the property market is suffering.
The days of double-digit economic growth in China are quickly becoming a distant memory. Beyond the property slump, China’s economy is grappling with weak consumer spending at home and tumbling demand for their exports abroad. China is targeting a modest 5% growth rate for this year. That’s well below its average growth rate of 8.95% going back to 1989, and a particularly weak recovery given the springboard effect that was anticipated with the end of COVID-19 lockdowns.
Nearly three years of stringent lockdowns took a toll on Chinese stocks. Hopes were high as the country began to roll back its “zero-COVID” policies. But following a weaker than expected recovery, the MSCI China ETF now sits 56% below its February 2021 peak.
On top of this, a crackdown on its major tech companies and recurring tit-for-tat trade restrictions with the U.S. have discouraged investors abroad.
It remains to be seen whether Chinese economic softening will lead to political instability. But for any country, growing numbers of disaffected youth with plenty of time on their hands is not a good thing for maintaining the status quo. A lack of white-collar jobs for China’s highly educated youth has created massive unemployment among 16- to 24-year-olds in urban areas, reaching a record high of 21.3% in June. It’s widely forecasted to have climbed further, but we can’t know with certainty – following the record-breaking month, the Chinese government began withholding employment data by age.
Amidst this backdrop, it’s no wonder Chinese consumers aren’t optimistic. China’s consumer confidence index, which measures consumer’s degree of satisfaction with the economic situation and expectations of future economic trends, reached a record low in November 2022. Just four months later, in a move that sounded familiar, the Chinese government stopped releasing consumer confidence surveys.
COVID-19 had a massive impact on the global economy. But China’s economy is still reeling. Remember… Property prices are on a multi-year cooling-off trend. GDP growth is slowing significantly. Stocks have plunged. Unemployment has spiked. And consumers are feeling a lack of confidence in the Chinese economy. None of this is to suggest that China can’t rebound. Beijing can provide more stimulus to stabilize the economy. It can improve international relations. It still has levers to pull. But it has work ahead. Investors in China should proceed with caution.
MEET THE AUTHOR
Michael Joseph, CFA
Michael is a Portfolio Manager and Deputy Chief Investment Officer at Stansberry Asset Management. His duties include sourcing investment opportunities and conducting ongoing due diligence across SAM’s portfolios. Michael co-manages our Income and Tactical Select strategies.
