China’s Economy: Bad News And More Bad News

Alarmingly, the music is slowing down in China, and all the records are getting rusty. To put things into a global perspective, Beijing is slashing interest rates even as the world economies tighten their monetary policy to curb inflation.

To make matters worse, the economy has been hit by a double whammy with irrational Covid-zero lockdowns impacting the supply side and the real estate, plagued with defaulters and incomplete projects, denting the demand side.

The 5 per cent growth rate target for this year is nearing impossible.

At the beginning of September, as many as 300 million people or 20 per cent of China’s population were under some sort of Covid-zero lockdown across 40-odd cities.

Consequently, a unique problem has surfaced — that of rotting and expiring food items.

Desperate retailers now offer canned meat, beverages, and other snacks nearing expiration at throwaway prices.

Further, in the last two years, an entire industry, valued at around $4.6 billion, focused on soon-to-expire food items, has come up, finding a market in the lower-income groups.

The economic slowdown is reflected in the non-perishable items as well. Retailers dealing in home appliances are now complaining of inflated inventories and declining revenues, given the weak demand.

In the first-half of 2022, China’s retail sales of home appliances have come down by 10 per cent year-on-year.

For manufacturers, inventory turnover periods have now increased between 25 per cent and 50 per cent. For most retailers, the pre-2010 boom, where the annual growth exceeded 10 per cent, is now history.

Some of the slowdown in the retail sector must also be attributed to the real estate crisis, no longer being supported by the endless stimulus that led to ghost towns across the country.

Beyond the protests by the homeowners, declining credit growth, and reduction in the issuance of dollar-dominated bonds by developers, the pressure is now mounting on local and provincial governments, given the fall of private players.

Thus, Beijing, through local government financing vehicles (LGFVs), is now picking up land across the country to aid local governments.

In the first half of 2022, land acquisitions through LGFVs were up by 70 per cent compared to 2021.

Purchasing of lands at inflated prices, cannot be ruled out either, given for some provinces, LGFV acquisitions are the bailout they have been wanting.

However, LGFVs are not expected to have some magic tricks up their sleeves to fix the real estate crisis, for the plots they buy will mostly remain idle.

Through LGFVs, Beijing is merely giving a long rope to provincial governments that rely on land sales to private developers for revenues.

On other economic fundamentals, China continues to falter.

In Shanghai, in April 2022, the overall retail sales and the food, beverages, and hotel industries suffered more in 2022 compared to February 2020, before making a recovery.

In March 2022, excavator sales were down by 63 per cent year-on-year, indicating a general slowdown in the construction industry. The area under new construction is the lowest in seven years, approaching levels last seen in 2009.

The economic anecdotes do not tell the complete story, however, for the opaqueness in the Chinese economy hinders any real-time evaluation of the crisis.

The one verifiable fact is that the Chinese economy is not going to grow at 5 per cent this year. If Beijing gets lucky, they may hit the 4 per cent mark, but market forecasts are placing their bets in the neighbourhood of 3.5 per cent.

As President Xi Jinping prepares to begin a lifetime term in a few weeks, the golden age of double-digit Chinese growth is coming to an end.

Desperate times ahead for China, but the consequences will be for the global economy.