Experts from world-renowned financial institutions began to reconsider their vision of the prospects of the dynamic of the economic system of China in the current year, and for Beijing, these new expectations are clearly not favorable and do not belong to the category of a positive assessment of the possibilities of the foreseeable future.
Goldman Sachs and Citigroup are already involved in the mentioned practice of revising forecasts. Experts from these financial institutions expect that the Chinese economy, currently the second largest in the world, will show an increase of 4.7% in 2024. In their opinion, this forecast regarding the growth prospects of the Asian country’s economic system is appropriate because industrial output in August fell to figures corresponding to a five-month low.
It is worth noting that Beijing is currently facing objective growth problems, the denial of which is equivalent to the denial of what can be described as an objective situation. Economic activity in China is weak and shows a slow pace. Currently, attention is growing to this fact, which is an objective reality for Beijing. The prevailing opinion among experts is that the Chinese authorities should take additional measures to stimulate demand.
Against the background of a slowdown in the world’s second-largest economy, global brokerage companies have worsened their forecasts regarding the prospects of this system in the current year. It is worth noting that in the context of the present state of affairs, the probability that the Chinese authorities will be able to achieve the economic growth target of about 5% in 2024 is significantly reduced.
The previous version of the Goldman Sachs forecast provided that the world’s second-largest economy would rise by 4.9% in the current year. Citigroup analysts, before revising their vision of the relevant prospects, expected that the mentioned indicator would grow by 4.8%.
Industrial output in China in August showed an increase of 4.5% compared to a year ago. These rates of growth in the corresponding indicator turned out to be the slowest since March 2024. The relevant information was published by the National Bureau of Statistics last weekend. In July, industrial output in the Asian country grew by 5.1% year-on-year.
Retail sales, the main gauge of consumption, increased by 2.1% in China in August. In July, the corresponding indicator grew by 2.7%. This result was recorded against the background of extreme weather conditions and the summer travel peak. It is worth noting that experts interviewed by the media predicted that retail sales in China would grow by 2.5% in August.
Analysts at Goldman Sachs, in a note published last week, said there was an increased risk that the target for gross domestic product (GDP) growth of about 5% set by the local government would not be reached in 2024. They also underlined that, against the background of relevant prospects, the relevance of Beijing’s measures to stimulate demand is rising. Goldman Sachs analysts have not yet changed their forecast for China’s GDP growth in 2025. They expect the corresponding figure to increase by 4.3% next year.
Citigroup analysts have revised downward their forecast for GDP growth in the Asian country next year. They expect the corresponding figure to increase by 4.2% in 2025. The previous version of the forecast provided for the growth of China’s GDP by 4.5% in 2025. Citigroup analysts said their expectations for the dynamic of the mentioned indicator had worsened due to the lack of major catalysts for domestic demand. Experts of this financial institution also say that, in their opinion, Beijing’s fiscal policy should be more active so that China can break the austerity trap and provide timely support for economic growth.
The latest data on the condition of the world’s second-largest economy shows its gloomy prospects. Currently, it is impossible to give an unambiguous answer to the question of the scale and quality of potential stimulus measures from Beijing. More intensive actions by the authorities of an Asian country to improve the situation in the space of the world’s second-largest economy will definitely have positive consequences, but whether the appropriate strategy will become a fundamental turning point on the way to achieving growth goals is not known for certain.
Eswar Prasad, professor of international trade and economics at Cornell University, said during a conversation with media representatives that the latest data on the state of affairs in the Chinese economic system contain sparsely positive components. Also in this context, the expert noted that the corresponding situation is typical for the last few months.
Eswar Prasad says that both long-term problems, including those related to real estate prices, and short-term troubles, including, for example, weak household consumption and a drop in private investment, have not been doing well at all. According to the expert, China’s economic prospects for the second half of 2024 are currently flashing red or close to it.
Duncan Wrigley, chief strategist at Everbright Securities International, said during a conversation with media representatives that the Asian country, despite various difficulties, still avoided the implementation of larger-scale negative scenarios. In the relevant context, it was noted that a significant downturn in the Chinese real estate market did not provoke a systemic financial crisis in this state and did not lead to the formation of a similar state of affairs at the global level. Duncan Wrigley underlined the more favorable situation in the Asian country compared to the history of many other subprime crises, including the big housing downturn in Japan. In the relevant context, the expert noted that to some extent, the Chinese government has managed to insulate a large adjustment in the housing market from the financial sector and prevent a bigger crisis. At the same time, Duncan Wrigley stated that Beijing is currently going through this sort of slow, painful, grinding adjustment.
It is worth noting that the state of affairs in the Chinese real estate market is still not what can be called a definitively formed situation that does not demonstrate subsequent changes. In August, the Asian country recorded a drop in house prices, the pace of which turned out to be the fastest in the last nine years.
Also, the state of affairs in the Chinese labor market does not contain reasons for optimism. Currently, the unemployment rate in the cities of the Asian country is at a six-month high.
Many experts, investors, and markets had high hopes for the recovery of the Chinese economy after the coronavirus pandemic which became what can be described as a kind of shock condition that paralyzed or significantly limited many processes. These hopes did not become reality, remaining in the category of preferred, but not fulfilled options of the future.
At the same time, it is worth noting that the Chinese economy is still on a growth trajectory, despite various difficulties and not the most positive prospects. Last year, the Asian country’s GDP increased by 5.2%. It is worth noting that these growth rates exceed the average in the global space. For example, the GDP of the United States grew by 2.5% last year. The same indicator of the European Union increased by about 0.7% in 2023.
Eswar Prasad criticizes the Chinese government for being too slow to take measures aimed at stimulating the economy. According to the expert, in this case, the use of monetary policy requires fairly significant actions. Eswar Prasad also stated the need for early action. According to the expert, the government of the Asian country is not involved in the relevant strategies.
Helen Qiao, chief Greater China economist and head of Asia economics at the Bank of America, said during a conversation with media representatives that the financial regulator of the Asian country, most likely, will not cut interest rates on the scale that the Federal Reserve is expected to do. It is worth clarifying that a more moderate approach to lowering the cost of borrowing by the People’s Bank of China is implied.
Helen Qiao also said that the slowdown in economic growth in the Asian country requires an easing of monetary policy. Separately, the expert noted that job security and an increase in income are the main factors of consumer spending, which are currently lacking in China.
Bank of America also revised downward its forecast for China’s GDP growth in 2024. Analysts of this financial institution expect that in the current year, the corresponding indicator will increase by 4.8%. The previous version of the Bank of America forecast provided that China’s GDP would rise by 5% in 2024.
Also, the mentioned financial institution expects that over the next two years, the economic growth of the Asian country may slow down to 4.5%. It is worth noting that the previous version of the Bank of America forecast provided for an increase in China’s GDP by 4.7% during the specified period.
Currently, a kind of consensus is being formed among the largest financial institutions within the framework of the opinion that it will be difficult for Beijing to achieve the economic growth target of about 5%.
Analysts at Bank of America say that the presidential elections in the United States, scheduled for November, are the main uncertainty factor for China’s GDP prospects. In the relevant context, they also noted that the relevance of the mentioned thesis is related to the fact that at present export is actually the only positive segment of the Asian country’s economic system. The corresponding indicator in August grew by 8.7% year-on-year. In July, exports increased by 7% compared with the result for the same period a year earlier. In monetary terms, the August result amounted to 308.65 billion dollars. It is worth noting that the experts interviewed by the media predicted that this indicator for the mentioned period will show a growth of 6.5%.
Besides, Bank of America analysts say that the pace of sequential economic growth in China may have reached its lowest point in the second quarter of 2024, and expansion is likely to stabilize at below-potential levels for the next two years due to inadequate policy support.
Eswar Prasad says that the Asian country’s manufacturing sector, which was in good condition a few months ago, is also starting to weaken. According to the expert, currently, the economic system of the Asian country is not in dire straits, but the corresponding situation is approaching.
Nomura noted that the data on economic activity in China released last week turned out to be weaker than the already weak market expectations. The experts of this financial company also drew attention to the slowdown in infrastructure investments in the Asian country. It was also noted separately that the relevant state of affairs is because the municipal authorities are limited by tough fiscal conditions. A significant downturn in the real estate market was also mentioned as a reason for the current situation.
Moreover, analysts at Nomura underlined that against the background of deep and wide pay cuts across the financial sector, the decline in housing costs in Chinese 1-tier cities accelerated. The mentioned category of cities includes Beijing, Shanghai, Guangzhou, and Shenzhen. Nomura also said that the volume of new home completions in China is at the lowest level since the summer of 2022 when a large-scale mortgage boycott was announced amid delays in the delivery of pre-sold housing. Analysts at the company note that the current state of affairs indicates that Beijing has failed to make significant progress in implementing its promises to ensure the delivery of pre-owned and unfinished homes.
Nomura experts also talk about the likelihood that the world’s second-largest economy will face a second wave of shocks. If this scenario is realized in practical terms, Beijing will face what can be symbolically called a repeat of the coronavirus shock. At the same time, the corresponding scenario is not insurmountable.
Despite numerous calls for more active measures in the economic space, Beijing continues to declare its commitment to what can be described as the principle of gradualism at the level of official rhetoric. The People’s Bank of China refuses to make radical decisions. It is possible that over time, a state of affairs will form that will force the financial regulator of an Asian country to move more actively and decisively, but this is only an assumption and one of the potential, but not guaranteed scenarios of the future.
At the same time, expectations remain in the markets and among investors, which are probably more correctly described as faith, that Beijing will nevertheless decide to introduce additional measures to stimulate the economy. One of the manifestations of the corresponding sentiment is that on Monday, September 16, Hong Kong stocks showed growth. In this case, the impact factor was the assumption, implying that the weak economic data for August may be perceived by the Chinese authorities as a reason to strengthen and expand stimulus measures. Also, supporters of the corresponding point of view are convinced that the beginning of a cycle of tightening of the monetary policy of the United States, which is actually unconditionally expected this week, will be an impetus for action by the financial regulator of the Asian country.
The Hang Seng Index rose 0.3% on Monday. The Tech Index showed an increase of 0.5%.
Barclays economists, including Jian Chang, said in a note on Monday that they are convinced that the disappointing data on activity, credits, and inflation will cause the People’s Bank of China to begin taking measures to intensively ease its monetary policy strategy soon.
The Asian country’s financial regulator may cut the reserve requirement ratio (RRR) for banks by 50-basis-point in the coming weeks until the end of September. This is the opinion of Barclays experts. They also admit the possibility that the mentioned indicator will be lowered by another half point during the first six months of next year.
Expectations that the projected start of easing the Fed’s monetary policy will become a factor impacting the strategy of the People’s Bank of China is largely because in this case the financial regulator of the Asian country will find itself in an expanded space for maneuver. According to CME FedWatch, traders estimate a 57% probability that the cost of borrowing would be half a point lower in China in September.
It is worth noting that in addition to the difficulties of economic growth, Beijing is currently also facing geopolitical tensions. The United States, as part of its officially declared desire to ensure national security, has already limited and intends to expand appropriate measures regarding the supply of advanced chips and equipment necessary for the manufacturing of microcircuits of the corresponding category to China, so that the Asian country cannot use the mentioned products to strengthen its military power. These decisions by Washington worsen the prospects for the development of Beijing’s technological potential, which is a factor of negative impact on the economy. Geopolitical tensions are a state of affairs that so far shows no signs of coming to an end or at least a limited easing. This situation can be characterized as a factor of external pressure on China’s economic prospects. Beijing has already found itself in a difficult position, but it has yet to pass a significant part of the trial.
As we have reported earlier, S&P Global Ratings Economist Says About China’s Ability to Deal With Property Crisis.
