Kavan Choksi Provides a Brief Insight into China’s Economy

Insight into China’s Economy
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China’s economy has managed to strongly rebound from the deep dive following the Covid-19 outbreak and has returned to its path gradually. The rebalancing from investment to consumption, from rural to urban migration, as well as from manufacturing to services, all have been set back by the pandemic, but need to restart to make growth inclusive and sustainable. As per Kavan Choksi, while recent data point to a swiftly fading rebound in China from the reopening at end-2022, the GDP growth must still remain above the 2023 government target of 5% as consumption normalizes and policy support protects infrastructure investment.

Kavan Choksi talks about the state of China’s economy

The economy of China grew by a seasonally adjusted 0.8 % in the second quarter of 2023, essentially surpassing market expectations of a 0.5 % increase but slowing sharply from the 2.2 % expansion that was observed in the previous quarter. Even though this marked the fourth consecutive quarter of economic expansion, it also highlighted that the recovery in the second largest economy on the planet is losing momentum and is uneven due to the possibility of disinflation and ongoing property downturn. Declining exports and record high unemployment rates among young adults have also contributed to the situation. All of these factors are a major area of concern for the policymakers. There is an increasing pressure on them to implement new stimulus measures. Easing of property controls and Central Bank interest rate cuts are being considered as potential measures that can be undertaken to address the economic challenges.

In June, the government signalled modest monetary easing with a 10bp cut to the medium-term lending facility rate. No further policy rate changes are expected this year. Rather, further cuts to banks’ reserve requirements ratio are pretty likely after the recent dip in credit growth. It is not clear yet how effective looser credit conditions might be in stoking activity in the near term, particularly if business and consumer confidence stays subdued. Authorities are likely to avoid a large credit stimulus. After all, a major increase in leverage may weigh on the credit profile of the country and add to systemic financial risk. On the other hand, more of a modest stimulus moves might struggle to gain traction and boost business and consumer sentiment.

The government in China recently announced measures to support property developers, including postponement of their loan repayments by a year. This can prove to be quite beneficial in stabilizing the sector. Residential project completions have picked up, which suggests that work on stalled projects has resumed. But property sales and starts fell again in June by 28% and 34% yoy, respectively. This underlined the risk of extended residential construction weakness. In the opinion of Kavan Choksi, the property sector is not likely to regain its position as a key growth driver, while consumption shall remain of high importance to China’s growth. Retail sales growth slowed to 3.1% yoy in June 2023, from the 18.4% growth in April which was an almost two-year record. But retail sales does continue to expand on a month-on-month basis.

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