Trading Signals 05/02 – 09/02
China’s Economy: Early 2024
Lately, experts have been discussing the slowdown in China’s economic growth, despite its GDP growing by an impressive 5.2% in 2023. Recently, Nobel laureate in economics Paul Krugman expressed in The New York Times that China is entering a period of “stagnation and disappointment.”
Krugman points out that China is falling short of expectations in most economic indicators, except for the official GDP. He also notes that the Chinese stock market is experiencing sell-offs: the MSCI China index has fallen by 9% this month, marking the worst performance since early 2016. This raises questions about the reasons for these issues, the prospects of the Chinese economy, and how these difficulties might affect the rest of the world.
Why Has China Slowed Down?
Experts have been discussing the slowdown in China’s economy, despite its GDP growth of 5.2% in 2023. Paul Krugman, a Nobel laureate in economics, stated in The New York Times that China is entering a period of stagnation and disappointment. He believes one of the reasons is poor governance, especially the actions of President Xi Jinping, which suppress private initiative.
Krugman also points to the instability of China’s economic model, highlighting low consumer spending and an overheated real estate market. The Business Insider expresses pessimism about the Chinese economy, stating that deflation in the country is a sign that a restructuring is necessary.
Moody’s recently downgraded China’s credit rating due to risks associated with the debts of local authorities and a downturn in the real estate sector. The agency predicts that China’s GDP growth will slow down in the coming years.
S&P Global Ratings compares the current situation in China with Japan’s economic stagnation in the 1990s. Reuters forecasts that China’s economic growth will continue to slow down.
According to experts, cyclical factors such as weak consumer activity, a crisis in the real estate market, and a reduction in foreign investments, as well as more long-term structural phenomena, are pressuring China’s economic activity. These include an excessively high share of investments in GDP, supported by high debt loads of businesses and local administrations, an aging population, and a second consecutive year of population decline.
One sign of weak domestic demand and excess production capacity in China is deflation. The consumer price index grew by only 0.2% over the year – the worst performance since 2009, and the producer price index fell by 3%, the most significant decrease since 2015.
Tensions with the US, sanction restrictions, and the relocation of production chains also affect China’s foreign trade. In 2023, China’s exports fell by 4.6% – the first decline since 2016, and imports fell by 5.5%; exports to the US and EU dropped by more than 10%.
Despite market expectations, the People’s Bank of China did not lower the cost of medium-term lending for banks on Monday but increased the volume of liquidity injections into the financial system. Next week, the PBOC will hold a meeting on basic interest rates for 1 and 5 years. The central bank is also considering further reducing mandatory reserve ratios.
At the end of 2023, Chinese leaders promised an active fiscal policy in 2024 to support economic growth of around 5%. Financing of expenses is planned through special issuances of sovereign debt and debts of local administrations. The government is expected to continue stimulating the economy, and the PBOC is expected to maintain low interest rates and possibly reduce them further. It is forecasted that China’s GDP growth in 2024 could be 4.5-5%.
In times of uncertainty, it is recommended to diversify investments and seek support from experienced professionals.
Attention should be drawn to the aging population issue in China. Nearly 19% of the population is over 60 years old, and 13.5% are over 65. The proportion of young people aged 15 to 59 is decreasing, now at 60%. Mortality rates in China exceed birth rates, which could lead to a population decline to 800 million by 2050.
Economists predict China’s economic growth at around 3.5%, which is 5 points lower than in 2021. This decline could impact China’s import volume, including goods from Russia.
China’s stock market is also witnessing a downturn. The Hang Seng China index has fallen by 2.4%, reaching its lowest level in nearly two decades, while the CSI 300 index has decreased by 1.6%. This drop in Hong Kong, where influential Chinese companies are listed, is causing concern among global investors.
After Chinese banks maintained their base interest rates unchanged, the market has shown signs of weakening. Investors were expecting more aggressive stimuli from the People’s Bank of China.
Bloomberg warns that investors anticipate a decline in the yuan and government bonds this year. Despite potential rate cuts, the People’s Bank of China has fewer options than other major global banks.
Investors expect the yuan to remain under pressure, while bonds will be supported by the PBOC’s easing policy. However, the devaluation pressure on the yuan and the low interest margin among Chinese banks limit the possibilities for rate cuts.
Traders see reasons to be more positive about emerging markets. High-yield markets could benefit from expected Federal Reserve rate cuts, while the potential inclusion of South Korea and India in global bond indices could give their assets an additional boost.
What to Do?
Experts believe that to revive the Chinese stock market, a more proactive policy is needed, as mere monetary easing no longer produces the expected effect. They argue that authorities need to adopt a more comprehensive approach to solving economic problems. Despite current challenges, Chinese stocks are expected to yield about 10% this year, especially shares of state banks and sectors with regular cash flow.
The Chinese government might take more decisive steps, such as implementing large-scale budget measures or comprehensive reforms to support economic growth.
However, there are concerns that the authorities might try to distract from internal problems by engaging in military adventures. For instance, if a military conflict with Taiwan starts, it could seriously hit the global economy, reducing it by 10% and leading to damages of about 10 trillion dollars, far more severe than the impacts of the Ukrainian conflict and the COVID-19 pandemic.
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