‘Boomy’ talk about the Chinese economy is a puzzle

The writer is the chairman of Rockefeller International

Something is wrong with the Chinese economy, but don’t expect Wall Street analysts to tell you about it.

In my experience, there has never been a greater gap between some of Rozier Investment Bank’s views on China and the reality on the ground. Perhaps reluctant to scale back their calls for a reopening boom this year, sell-side economists stick to their forecasts for GDP growth in 2023, and now expect it to top 5 percent . That’s even more optimistic than the official target, and wildly outnumbered by the dismal news from Chinese companies.

The reopening hopes were on the grounds that once freed from the lockdown, Chinese consumers would go on a spending spree, but there is no indication of that in the company report. If China’s economy was growing at 5 percent, based on historical trends, corporate revenue would be growing faster than 8 percent. Instead, revenue grew 1.5 percent in the first quarter.

Corporate revenue is now growing at a slower pace than officially declared GDP in 20 of China’s 28 sectors, including consumer favorites ranging from autos to home appliances. The weak revenue in turn led to disappointing earnings for consumer goods companies, which typically track GDP growth fairly closely, but fell short in the first quarter. Rather than rebound, the MSCI China stock index has fallen 15 percent from its January peak and consumer discretionary stocks are down 25 percent since then.

If the analysts were correct, and consumer demand was picking up in what has been described as a “boomy” economy, then imports would be strong. Imports fell 8 per cent in April. When retail sales and industrial production came in below analysts’ estimates last week, some attributed the shortfall to “seasonal adjustment,” as if spring had arrived unexpectedly this year.

China’s credit growth is also weakening, slowing to just Rmb720bn ($103bn) in April, faster than forecasters had expected. The debt service burden of Chinese consumers has doubled over the past decade to 30 percent of disposable income – a level three times higher than in the US. Many Chinese youth need a job before embarking on a spending spree: urban youth unemployment is rising and topped 20 percent last month.

These facts point to the source of the rot. Since 2008, China’s economic model based on government stimulus and increasing debt, much of it coming into property markets, has become the main driver of growth. With the debt being so high, the government was very restrained in its stimulus spending during the pandemic.

By the beginning of this year, the Chinese had amassed additional savings equal to 3 percent of GDP during the pandemic. The comparable figure in the US was 10 percent of GDP. While the US got a big boost in reopening with incentives, China didn’t get one this time.

The growth model dependent on stimulus and debt was always going to be unsustainable, and now it has run out of steam. Much of the stimulus over the past decade flowed through local governments in China, which used their own “financing vehicles” to buy and sell real estate, fueling a boom in the property market. Those vehicles are fast running out of cash to service their loans, which is curbing their investment in the property market and industry as well. Industrial sectors are slowing faster than the consumer-related businesses at the center of the reopening story.

Although Beijing still aims for 5 percent growth, it has halved its potential. GDP growth is likely a function of population and productivity growth: China’s negative population growth means fewer workers are entering the labor force, and heavy debt per worker is slowing output.

China’s government has long been suspected of inflated its GDP numbers to achieve its growth goals. But the cheerleading from Wall Street is now reaching a crescendo as analysts call for reopening to see it more apt to stay the course – even if it requires highly selective use of official data – than to reverse itself.

While rosy forecasts may do little for analysts, the rest of us do. “Boomy” chatter has contributed to hundreds of billions of dollars of investor losses in China over the past four months. Furthermore, global growth could prove weaker than expected in 2023, as the US recession is expected to be countered by China’s reopening boom, which may never come. The time has come to expose this conspiracy before the fallout gets worse.