(Bloomberg) — It was meant to be the year China’s economy, unshackled from the world’s strictest Covid-19 controls, roared back to help power global growth.
Instead, halfway through 2023, it’s facing a confluence of problems: Sluggish consumer spending, a crisis-ridden property market, flagging exports, record youth unemployment and towering local government debt. The impact of these strains is starting to reverberate around the globe, impacting everything from commodity prices to equity markets. The risk of Fed hikes tipping the US into recession has also heightened the prospect of a simultaneous slump in the world’s two economic powerhouses.
What’s worse, President Xi Jinping’s government doesn’t have great options to fix things. Beijing’s typical playbook of using large-scale stimulus to boost demand has led to massive oversupply in property and industry, and surging debt levels among local governments. That’s sparked a discussion about whether China is headed for a Japan-style malaise after 30 years of unprecedented economic growth.
Exacerbating this is Xi’s more assertive approach to dealing with the US, which has added fuel to American efforts to cut China off from supplies of advanced semiconductors and other technologies set to drive economic growth in the future.
Altogether, the dynamics threaten not only to lead to disappointing growth this year, but also to thwart the Chinese economy’s momentum to surpass that of the US.
“A few years ago, it was difficult to imagine China not rapidly overtaking the US as the world’s biggest economy,” said Tom Orlik, chief economist for Bloomberg Economics. “Now, that geopolitical moment will almost certainly be delayed, and it’s possible to imagine scenarios where it doesn’t happen at all.”
In a downside scenario — with a sharper property slump, slow pace of reforms and more dramatic US-China decoupling — Bloomberg Economics sees China’s growth decelerating to 3% by 2030.
Base Effect
China’s $18 trillion economy is struggling across a range of sectors. Data released Friday showed the economy lost more steam in June, as manufacturing activity contracted again and other sectors failed to build momentum.
In the debt-strapped southwestern province of Guizhou, officials are seeking bailouts from Beijing. In the manufacturing hub of Yiwu in coastal Zhejiang province, small businesses say sales are down substantially from 2021 levels. Over in the city of Hangzhou, the home of e-commerce giant Alibaba Group Holding Ltd., a government regulatory crackdown on the tech sector and tens of thousands of layoffs are now affecting the property market.
China’s official growth target of around 5%, which was deemed unambitious when it was announced in March, now looks more realistic. Goldman Sachs Group Inc. in June cut its forecast for China’s growth this year to 5.4% from 6%.
At first sight, in a world economy expected to grow a meager 2.8%, that doesn’t look too shabby. The reality, though, is that with China still under Covid rules in 2022, a low base for comparison is flattering the headline. Netting out the base effect, growth for 2023 will look closer to 3% — less than half the pre-pandemic average, Bloomberg Economics said.
If the government continues to sit on its hands, things could get worse. In a scenario where property construction crumbles, reduced land sales hit government spending, a US recession weakens global demand and China’s markets shift to risk-off mode, Bloomberg’s SHOK model shows another 1.2 percentage points shaved off growth.
“We’re caught in a kind of vicious circle in the sense that you need a massive stimulus to create a little moderate impact,” said Keyu Jin, an economics professor at the London School of Economics and Political Science who wrote The New China Playbook: Beyond Socialism and Capitalism.
“We have to be prepared for slower growth in the future because China is really in transition right now from industrialization to innovation-based growth,” she said. “Innovation-based growth is just not that fast.”
To be sure, China’s policymakers have defied the doomsayers before and could do so again. A bigger-than-expected stimulus, proactive moves to resolve bad debts, a commitment to support entrepreneurs and extending an olive branch to the US could dispel some of the pessimism.
But for now, the lack of substantial stimulus or real reform is frustrating investors. The 12% rally enjoyed by the MSCI China Index in January proved a false dawn as the gauge steadily gave back all the year’s gains. It’s now down about 6% in 2023 and Wall Street’s biggest banks are cutting forecasts to levels that suggest it will struggle to reclaim the levels seen earlier this year.
The yuan’s CFETS basket has fallen every week since late April, a losing streak unmatched since the China Foreign Exchange Trade System started compiling the data in 2015 — and enough to see the People’s Bank of China step in to prop up the currency.
Confidence Trap
At the start of 2023, optimism was high that China would see a rapid recovery in consumer spending, fueled by revenge shopping, eating out and travel. But anxiety about what weaker growth means for unemployment and incomes, combined with the negative wealth effect from a slumping property sector, has prompted people to save rather than spend.
Xiao Jin was one of the people hoping the abrupt end in December of three years of Covid Zero would mean shoppers would flock back to her toy shop in Zunyi, a city in Guizhou.
“We barely made any money in the last three years,” Xiao, a mother of two children, said outside her shop in mid-June. But “business is even worse than last year.”
At the heart of wilting consumer sentiment is the property market. The slump followed the government’s attempt to crack down on heavily indebted real estate developers in 2020 to reduce risk. That pushed housing prices down and a number of the weaker companies defaulted. Many developers stopped building houses they had already sold but hadn’t yet delivered, prompting some home owners to stop paying their mortgages.
This turbulence was a wake up call for many Chinese, who have long considered property a sure-bet investment and used it as a store of wealth.
And there’s no indication the fall in property prices is attracting the new buyers needed to kickstart a rebound. Banks advanced the smallest amount of longer-term loans to households last year in almost a decade and borrowing was down another 13% in the first five months of this year, indicating fewer people are taking out new mortgages.
Another worrying sign is youth unemployment. At 20.8%, the jobless rate for those aged 16 to 24 is the highest since China began publishing the data in 2018 and is four times the national urban rate. A big reason is the slump in services industries as a result of strict Covid rules and the decline in the property market. The tech crackdown also took away a lucrative career path for many young, ambitious graduates.
At a recent job fair in Beijing, Wu Yuanhao, 27, said he’s looking for a position in the e-commerce industry, but firms are cutting staff and pay is about 20% lower than three years ago, when he last looked for a job.
“The job searching prospects are not as good as before,” he said. “The competition is in fact very fierce.”
Exports Weaken
It’s not only domestic demand that’s disappointed. Foreign trade had been a consistent support during the pandemic as Chinese factories rushed to fill US and European orders, but it’s dwindled in recent months. Since peaking at a record $340 billion in December 2021, exports in May were down almost $60 billion and are set to continue dropping as rising interest rates weigh on growth in the US and Europe.
In Yiwu, Huang Meijuan has been selling artificial Christmas trees all over the world for more than 20 years. This year she expects sales to drop 30% from 2022’s record.
“In the past two years, customers actually placed big-value orders online as the international market was strong,” said Huang. “Now the customers are back, but they are checking around to compare prices and coming back to bargain hard.”
Fading growth momentum is contributing to China’s consumer inflation staying at close to zero. Factory gate prices have already tipped into deflation — leaving businesses with less income to repay their debts.
That economic weakness has forced Beijing to shift gears. The central bank cut interest rates in June and the State Council, China’s cabinet, said it’s discussing new support measures for the economy. Possible options include a further easing in property restrictions, tax breaks for consumers, more infrastructure investment and incentives for manufacturers, especially in the high-tech sector.
Still, property and infrastructure stimulus will probably be “targeted and moderate” given the shrinking population, elevated debt levels and Xi’s call for curbing property speculation, Goldman Sachs analysts in China wrote in mid-June.
Hidden Debts
The reason that large infrastructure-led stimulus isn’t viable anymore is clear if you walk around Zunyi or travel out of the city into the countryside. While the impoverished and mountainous province of Guizhou did need some investment, it’s now awash in expensive bridges, tunnels, roads and airports. And it’s struggling to pay back the debt it took on to finance all that construction, forcing it to make pleas to Beijing about its severe debt crunch.
Zunyi, a city of 6.6 million people, is served by two different airports about an hour from the downtown. Three hours away by car, there’s another airport in the city of Liupanshui. It opened in 2014 at a cost of 1.5 billion yuan ($208 million), but the airport now has few commercial flights. On a recent visit, on a day when there were no scheduled flights, the only people in the terminal were a security guard, a few cleaners and some attendants in deserted shops who were eating lunch.
Much of the funding for these projects, and others around the country, came from local government financing vehicles — companies created by municipalities to borrow on behalf of cities, towns and provinces — with that debt not appearing on their balance sheets.
It’s this “hidden debt” that’s become a major risk for China’s local governments and a big worry for investors who have bought bonds sold by the local government financing vehicles. The International Monetary Fund estimated in February that nationwide there was 66 trillion yuan of this debt at the end of 2022, up from 40 trillion yuan in 2019, with that quick increase underscoring how local governments ramped up off-book borrowing and spending during the pandemic.
Local governments are themselves under financing pressure. They had come to rely on land sales to property developers to top up their coffers, but that source of revenue is drying up due to the housing downturn.
With the central bank now starting to cut rates, and cities across the country lowering the down-payment requirements and removing restrictions on buying multiple properties, the lackluster state of the property market might gradually change. But massive oversupply means it will take a while for any property stimulus to flow through to actual housing construction, if it does at all.
Back in Hangzhou, home prices in some neighborhoods are down almost 30% from a peak in late 2021, according to multiple real estate agents. The slump is an abrupt change for the affluent city that served as host to the Group of 20 summit back in 2016. At the time, Xi said it showcased “what has been achieved in the great course of reform and opening-up China has embarked upon.”
“I’ve never seen such a fast decline in such a short period of time in Hangzhou,” said an agent surnamed Gao who has worked in the industry in the city for almost a decade, asking to be identified by her last name because she wasn’t authorized to speak publicly. “It’s completely a buyer’s market now.”
Wang, the wife of an Alibaba employee, listed one of the couple’s two apartments in the city for sale in early June after a round of job cuts at the tech giant.
“For the first time, the layoff news made me rethink whether the mortgages we’ve undertaken are too high,” said Wang, who asked to be identified by her surname only because she was talking about a private matter. “It might be time to prepare for darker times ahead.”
–With assistance from Yujing Liu.
(Updates with manufacturing data in eighth paragraph.)
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
