When janet yellen visited Beijing this month she did her bit for the local restaurant trade. America’s treasury secretary dined with her team at an establishment known for Yunnanese dishes, which subsequently unveiled a “God of Wealth” menu in her honour. She also hosted a lunch with female entrepreneurs and economists (including a representative of The Economist). Although restaurants have prospered since China dropped its covid controls at the end of last year, the gods of wealth have been less kind to the rest of the country’s economy—as gdp figures released on July 17th revealed.
They showed that the economy grew by 6.3% in the second quarter compared with a year earlier. That looks impressive. But it was slower than expected. And the figure was flattered by a low base in 2022, since Shanghai and other cities were locked down last year. The economy grew by only 0.8% in the second quarter compared with the first three months of the year, an annualised rate of merely 3.2% (see chart 1).
Obstacles to growth were both foreign and domestic. The dollar value of China’s exports, for example, shrank by more than 12% in June, compared with a year earlier—the sharpest drop since the height of the pandemic in February 2020. “The recovery of the world economy has been sluggish,” said Fu Linghui of the National Bureau of Statistics, by way of explanation. Meanwhile, the recovery of China’s property market is lost in the vegetable patch. Sales of flats fell by 27% in June compared with a year earlier. They are now running well below the pace economists think would be justified by underlying demand, given China’s urbanisation and the widespread desire for better accommodation.
China’s “nominal” growth, before adjusting for inflation, was also weaker than the inflation-adjusted figure; something that has happened only four times in the past 40 quarters. It suggests that the price of Chinese goods and services is falling. Indeed, it implies they fell by 1.4% in the year to the second quarter, which would be the sharpest drop since the global financial crisis (see chart 2).
Consumer prices did not rise at all in June compared with a year earlier, and producer prices—charged at the factory gate—fell by 5.4%. China’s statisticians have blamed this weakness on changes in global commodity prices, such as the falling cost of oil. That is an unconvincing explanation for the weakness of China’s nominal growth, because gdp should count only the value added to a good in China itself, thus excluding the value of imported commodities. Perhaps deflationary pressures are spreading. Or perhaps China’s statisticians have got their sums wrong.
Some members of the public feel the economy is doing even worse than the official figures suggest. There is a “temperature difference” between the macroeconomic data and “micro feelings”, as one commentator put it. In response, Mr Fu of the National Bureau of Statistics pointed out that macroeconomic data is more comprehensive and reliable than “micro feelings”—prompting a netizen to joke that if state statisticians say you are okay, you should adjust your feelings accordingly.
The government’s own feelings towards the economy are hard to read. During the global financial crisis, after world trade fell off a cliff, China’s authorities swooped in with vast stimulus, which propelled economic growth and spilled over to the rest of the world. Today they seem in no such rush. The country’s central bank has cut interest rates a little. Tax breaks on the purchase of electric vehicles have been extended. Yet those hoping that the State Council, China’s cabinet, would release a detailed fiscal stimulus plan after its meeting on Friday 14th were disappointed.
This lack of urgency may reflect the government’s enduring confidence in the recovery. Officials may believe that the economy still has enough momentum to meet their targets for the year, including for gdp growth of around 5%. The government’s restraint may also betray its misgivings about additional stimulus. Policymakers do not want a lending and spending spree to erode the profitability of state-owned banks or undermine financial discipline among local governments.
China’s economic reopening so far has been led by services industries, such as restaurants, that tend to be labour-intensive. China’s cities have added 6.8m jobs in the first six months of the year, more than half of the government’s 12m target for the year. Although unemployment among urban youth increased to 21.3%, the overall jobless rate remained steady at 5.2% in June, below the target of 5.5%.
But the labour market can be a lagging indicator of economic momentum. If growth remains weak, unemployment will eventually edge up. In such a scenario, the government may be forced to do more to revive the economy. Officials can tolerate a temperature difference between data and people’s feelings. They will be unwilling to tolerate a glaring gap between the economy and their targets. ■
China’s Ailing Pork Demand Another Sign of Economic Distress
(Bloomberg) — The fall holidays in China are usually boom-time for pork consumption, as parties and cooler weather entice households to splurge on the nation’s favorite meat.
The Mid-Autumn Festival on Friday typically gathers friends and family over celebratory fare like braised pork belly or sweet and sour ribs. This year, the lunar holiday is followed in short order by the weeklong National Day break, which should extend demand for the more expensive meatier dishes beloved by Chinese.
But consumption is falling flat and supplies are ample. Much of the blame lies with a weak economy and financial uncertainty that to some degree has affected all of China’s commodities markets. Prices of hogs and pork, which usually rise in anticipation of shoppers opening their wallets, have actually fallen. It’s a troubling sign for an industry that has yet to recover from the constraints imposed by the pandemic.
“Pork is selling poorly,” said Yao Shangli, a wholesaler based in Shanghai supplying restaurants in the city. “Look at the economic situation now. The economy is bad. There’s no demand. There wasn’t a wave of stock-building before the holiday either,” he said.
Chinese pork consumption is nearly five times that of 40 years ago, mirroring the rise of the middle classes. But even relatively well-off households are watching the pennies as the economy slows and a protracted property crisis saps confidence.
The impact will be felt as far afield as the Americas, whose farmers supply most of the animal feed for China’s vast pig herd. There’s also a direct impact on financial markets because of the meat’s weighting in the basket of food monitored by China’s central bank, with a drop in pork prices contributing to deflationary pressures in the economy.
In the wet markets of Guangdong in southern China, sales of fresh pork have been slow, said Citic Futures Co. Meat that should have sold out in the morning was still sitting on shelves in the afternoon, according to a report from the broker at the weekend.
Hog prices nationwide have dropped over 5% so far this month, and wholesale pork prices have also turned lower. Slaughter rates at abattoirs are flat.
Carcass sales have slowed and slaughterhouses aren’t getting many orders, according to commodities consultancy Mysteel, which cited the impact of the sluggish economy.
“This round of restocking for the holidays is basically over and demand didn’t really kick off,” said Zhu Di, an analyst with GF Futures Co.
Demand for cured pork usually rises toward the end of the year and that could give the market a boost, according to Zhu. “But I’m not sure how much it will be,” she said. “There’s too much supply. We are quite pessimistic about prices in the fourth quarter.”
That puts Chinese farmers in a bind. Profitability is already lagging pre-pandemic levels, due to a combination of oversupply, weak demand, high feed prices and the costs of fending off diseases like African swine fever.
With hopes dashed this time around, the focus will switch to the run up to the next festival period around Lunar New Year — the period of heaviest demand for pork in the Chinese calendar.
The Week’s Diary
(All times Beijing unless noted.)
Thursday, Sept. 28
- China weekly iron ore port stockpiles
- Shanghai exchange weekly commodities inventory, ~15:30
- China Intl Aluminum Week in Yinchuan, Ningxia, day 3
Friday, Sept. 29
- China’s Mid-Autumn Festival holiday
Saturday, Sept. 30
- China’s official PMIs for September, 09:30
Sunday, Oct. 1
- Caixin’s China PMIs for September, 09:45
On the Wire
Saudi Aramco will start talks to buy a 10% stake in a Chinese refining and petrochemical company, as it looks to boost its presence in the world’s biggest energy importer.
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Chinese social media censored a top economist for his bearish predictions. He now warns that China’s property crisis will take a decade to fix
How long will it take to fix China’s flailing real estate sector? One of the country’s most prominent economists, who was ejected from its social media platforms for his bearish predictions about the economy, thinks it might take 10 years to fix.
“Fixing the property sector may be a multiyear or even a decade’s work in front of us,” Hong Hao, chief economist for Shanghai-based hedge fund Grow Investment, said on CNBC Tuesday.
That will mean more pain for China’s suffering real estate sector, now two years into its debt crisis. A default in 2021 by China Evergrande Group, one of the country’s largest private developers, sparked contagion across the whole sector as financing dried up. Construction stopped, leading to protests as homebuyers realized they might never get the homes they paid for.
Now with China’s economy underperforming after the COVID pandemic, Beijing officials are grappling with how to wean the economy from real estate without torpedoing the economy in the short term.
For much of the past decade, Chinese developers like Evergrande went on a debt-fueled construction spree, building millions of new homes throughout the country. That’s led to an oversupply, dragging down prices.
“We built way too much housing for Chinese people,” Hong said on CNBC.
Demand is also in long-term decline. Investment bank Goldman Sachs estimated in August that China’s annual urban housing demand peaked at 18 million units in 2017, and will fall to 11 million units this year and 9 million units by 2030.
On Tuesday, Hong pointed to slowing rates of urbanization, with fewer rural Chinese moving to the cities for work. “Two years ago, we were selling 18 trillion yuan [$2.5 trillion] worth of property,” he said. “This year, we’d be lucky to do even [10 trillion yuan], and going down the road, we’d be lucky to do even [5 trillion] or [6 trillion].”
Hong is an outspoken commentator on China’s economy, growing his audience during his tenure as the head of research of BOCOM International, a division of state-owned Bank of Communications.
Yet Hong’s takes were censored last year amid China’s tough COVID lockdowns in cities like Shanghai. Hong argued that the lockdown, which trapped millions of people to their apartments in a bid to stop an outbreak, would hurt China’s economy and would encourage capital flight.
When Hong got a new gig at Grow International a few months later, he warned that those working at state-owned brokerages were starting to face restrictions about what they could say. “Even if you don’t speak the truth, market prices will tell the truth,” he told Reuters at the time.
Hong’s suspension was an early indicator of Beijing’s censorship of bad economic news. This year, regulators are asking analysts and economists to stop using negative language to describe China’s economy—think “subdued inflation” rather than deflation—and the statistics bureau has stopped releasing some indicators like consumer confidence and youth unemployment.
China’s economic recovery has stagnated. Retail sales and manufacturing have grown at lower-than-expected rates for much of the year, and foreign trade has plunged. Still, Chinese economic data beat forecasts last month, suggesting that government support measures may finally be having an effect.
China’s property crisis
China’s real estate sector contributes as much as a third of the country’s GDP. Yet the sector’s liquidity crisis shows no signs of ending anytime soon.
China Evergrande, whose default arguably triggered the crisis in the first place, missed a payment on an onshore yuan-denominated bond on Monday. The developer revealed over the weekend that it could not issue new debt. Chinese authorities are also probing the developer’s former CEO and CFO, reports Caixin.
The bankrupt developer faces a liquidation petition on Oct. 30.
Another major Chinese developer, Country Garden, is also having debt issues. The developer, which has four times as many projects as Evergrande, recently made a $22.5 million interest payment with just days to spare.
While China has relaxed some real estate policies in a bid to stabilize home prices, analysts think that the glory days of the sector are over.
That may be by design, as officials try to wean China off its real estate sector. On CNBC, Hong suggested that once China’s economy relies on other industries rather than the property sector, then “we will have a better, much healthier Chinese economy than before.”
“Not having an overbearing Chinese property sector actually is good for the Chinese economy going forward,” he said.
This story was originally featured on Fortune.com
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