China's Growth Disappoints, Global Markets Falter- CurrencyVeda Analysis

China’s Underwhelming Growth Rattles Global Markets; Calls for Stimulus Measures Grow – CurrencyVeda Analysis. Sluggish recovery, weakening yuan, and lopsided rebound worry investors. GDP forecast adjusted, prompting hopes for a policy response.

Date: May 31, 2023
Place- New Delhi, India

Equity markets worldwide are feeling the impact of China’s underwhelming economic rebound and the Chinese government’s reluctance to implement significant stimulus measures. As concerns grow over the loss of momentum in China’s recovery from pandemic-induced restrictions, investors are scaling back their expectations for the country’s economic performance. Recent data suggest that gross domestic product (GDP) growth for this year will likely be closer to the government’s target of approximately 5%, contradicting earlier expectations of a substantial overshoot. Moreover, the rebound appears imbalanced, with consumer services leading the way while industrial activity lags.

Analysts, such as Chaohui Guo from China International Capital Corp, note that there is a downward adjustment in expectations for China’s recovery. In equity markets, the CSI 300 Index has given up approximately half of its gains from the reopening trade that began in November. Furthermore, the weakening Chinese yuan, which broke through the critical 7-per-dollar level, serves as an indicator of an economy in distress.

China’s property market, which experienced an initial rebound, is now seeing a slowdown in sales. This, coupled with the ongoing financial difficulties faced by real estate developers, is hindering the initiation of new projects in a sector that contributes around 20% to China’s GDP, considering related industries. Additionally, local governments’ substantial debt burdens are constraining infrastructure spending, exemplified by a state-owned firm’s last-minute bond repayment.

Bloomberg reports reveal that China’s economic recovery weakened in May as manufacturing activity declined, prompting investors to sell off stocks and call for more stimulus measures to stimulate growth. The official manufacturing purchasing managers’ index fell to 48.8, its lowest reading since December 2022 and lower than the Bloomberg survey’s median estimate of 49.5, signaling a contraction from the previous month. The non-manufacturing gauge for the services and construction sectors also slid to 54.5 from 56.4, falling short of expectations.

This data confirms that China’s economic recovery has cooled in the second quarter after an initial surge in consumer activity earlier in the year. As a result, calls for additional stimulus measures, such as interest rate cuts, are becoming more prominent as investors adopt a more pessimistic outlook on growth. Weak exports, a fading property market rebound, and declining profits for businesses further contribute to this sentiment.

Ho Woei Chen, an economist at United Overseas Bank Ltd. in Singapore, emphasizes that this data adds to the indicators since April that suggests a continued slowdown in the economic recovery’s momentum. The weak domestic inflation also puts pressure on monetary policy support to be escalated.

China’s faltering recovery has created turmoil in financial markets. The gauge of Chinese equities listed in Hong Kong experienced a 2% slide, making it the worst performer in the region. The offshore yuan has weakened by 0.38% to 7.1182 against the dollar, extending its loss in May to 2.7%, the highest in three months. Copper futures in London have also declined, setting the metal up for its worst monthly loss in nearly a year. The sharp contraction in China’s steel purchasing managers’ index, recording a reading of just 35.2 (the lowest since July 2022), has caused iron ore prices in Singapore to drop by as much as 3.3%, falling further below $100 a ton.

The slowing expansion of the services sector, which has been the primary driver of China’s recovery this year and a significant source of employment, particularly for young people, is another concerning sign. The services sector’s index dropped to 53.8 this month from 55.1 in April. Xing Zhaopeng, the senior China strategist at Australia & New Zealand Banking Group Ltd, highlights that the sub-index for new orders in services was below 50, indicating a demand gap. Slower growth would also intensify pressure on youth unemployment, which is already at record-high levels.

Economists have revised their growth forecasts for the year to 5.5%, which still exceeds the government’s conservative target of around 5%. While many expect the central bank to ease policy this year, such as by reducing the reserve requirement ratio for banks or cutting interest rates, officials remain hesitant to implement aggressive measures. Yang Zhiyong, executive director of Beijing Gemchart Asset Management Co, expresses frustration over the lack of fulfillment of earlier promises to support the economy.

Chinese state media sources cite analysts who suggest that more pro-growth policy measures, such as interest rate cuts and increased bond sales, may be on the horizon. Beijing is likely to take targeted steps to boost the economy, considering new tax incentives worth hundreds of billions of yuan for high-end manufacturing companies, according to an informed source. Zhiwei Zhang, the chief economist of Pinpoint Asset Management, remarks that the government’s interpretation of the current economic condition remains unclear, and there are no immediate signs of a policy response. The government may maintain a “wait and see” stance for now.

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