China’s economy is fast becoming a major concern for investors. While central banks in the US and Europe are still struggling to bring inflation down from above the target level, China now has the opposite problem.
The world’s second-largest economy has slipped into deflation, with prices falling 0.3% on an aggregate annualised basis in July. This is reflective of a weak growth picture, as China’s short-lived rebound from pandemic-induced lockdowns dissipates.
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Annual GDP growth has significantly undershot forecasts, coming in at 6.3% in the second quarter from a low, lockdown-impacted base, versus forecasts of 7.3%. The strong start to the year generated by the re-opening of large parts of the economy fell away rather alarmingly during late spring and early summer. Heavy indebtedness at local government and regional level are compounding the impact of waning consumer confidence.
China’s increasingly dysfunctional property market continues to be a huge worry lurking in the background. Evergrande, the most valuable property company in the world in 2018, has seen 99% of its value wiped out since its debt struggles became apparent in 2021, and it filed for bankruptcy in August.
Fellow property developer Country Garden could be the next domino to fall, with the firm being unable to meet debt payment deadlines, and requesting extensions from lenders.
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“At the heart of China’s economic turmoil lies an escalating real estate crisis,” notes Lazard head of emerging markets, James Donald. “With over 3,000 developments and a vast land bank primarily located in China’s most overbuilt tier-three and tier-four cities, the company’s struggles have heightened concerns of systemic contagion.”
The Chinese economy is not being helped by broadly unfavourable demographic trends that stem in part from the former ‘one child’ policy. Geopolitical tensions are bubbling beneath the surface, with its support for Russia a particular bone of contention with the West. There is also the elephant in the room of what seems to be the inevitable invasion of Taiwan at some point during the next few years, which could unleash all manner of consequences.
To read more, visit the September edition of Portfolio Adviser Magazine
