China’s growing problems

   By Guest Blogger Ryan Lewenza

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China’s journey from a third world, largely agrarian economy a few decades ago to the economic and manufacturing powerhouse that it is today is nothing short of an economic miracle. Funny how that happens when you shift away from a socialist and centrally planned economy to a more capitalistic and market-based economy.

Indeed, China’s GDP has exploded from US$396 billion in 1990 (7% of US GDP at the time) to US$18.3 trillion in 2022 (73% of current US GDP). This phenomenal growth helped to lift 800 million people out of poverty, increase China’s life expectancy by 10 years and drive literacy rates from 87% in 1990 to 99% today.

Given the growth and success of China’s economy, some have even made the bold prediction that China’s economy will one day surpass that of its chief rival – the United States. For example, Goldman Sachs economists are calling for China’s economy to surpass the US by 2035.

I’m not so sure about this as I see a number of challenges for China that have been building up that President Xi Jinping needs to address, or not only will China not eclipse the US, China risks losing a lot of the momentum and gains it’s made in recent decades.

Below is a chart that shows the deceleration of economic growth in recent years. In the chart I show the longer term trend by calculating a rolling 3-year average of China’s GDP. For example, back in 2008 China’s economy was growing at an average rate of 12% y/y and this has now slowed to 5% in recent years.

China GDP Y/Y Rolling 3-Year Average

Source: Bloomberg, Turner Investments

The question then is why is China’s economy slowing?

First, China’s real estate market is very weak right now. Sales and prices are falling across China and a few of the big developers are in trouble of going bankrupt. In 2021 all the focus was on was Evergrande and now Country Garden, China’s largest real estate developer, is at risk of defaulting on its massive debt. Its bonds have been in freefall and recently it missed an interest payment, raising concerns of a potential default. This matters a lot with China’s housing market and related industries accounting for almost 25% of the country’s GDP.

China House Prices Have Been Steadily Falling

Source: Credit Suisse

Second, youth unemployment has skyrocketed from 12% before Covid to 21% today. This has large implications for the economy and society. If young people don’t feel optimistic about the future they spend less, they make less babies, and overall contribute less to the economy.

China’s Youth Unemployment Hits a Record High

Source: National Bureau of Statistics. NY Times

Third, exports have been trending lower for a few years and last month China’s exports fell 14.5% y/y, which was the steepest decline since Feb 2020. China is a manufacturing/export powerhouse providing a lot of the goods we buy and consume. A hit to that sector will greatly impact China’s economy and GDP.

Fourth, related to that, global companies are starting to move away from China for production and investment. Apple, for example, is moving more production to India to reduce its dependency on Chinese factories. Foreign direct investment in China tumbled 50% in 2022 y/y to $180 billion, which marked the lowest inflow since 2017. Factors like higher labour costs, rising trade tensions with the US, and the government cracking down on companies, particularly in the tech sector, is causing CEOs, investors, pension funds etc. to reconsider their focus and investments in the country.

Fifth, China’s demographics are terrible as the country ages. Last year China’s population actually declined and its prime working-age population has peaked and is expected to decline by 40% over the next 30 years. Population growth is a key long-term driver of economic growth (productivity gains being the other driver) so as the population ages this will weigh on future economic growth.

China’s Working-Age Population Has Been Declining

Source: Credit Suisse

Putting it all together, China’s economy is slowing and given it’s the second largest economy in the world, this is negative for global growth and commodity demand. Premier Xi Jinping and his current Politburo have some real challenges ahead and they better get to work and start addressing them or they risk derailing the economic miracle that they’ve achieved over the last few decades.

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Investment Advisor, Private Client Group, of Raymond James Ltd.

Source: https://www.greaterfool.ca/2023/08/12/chinas-growing-problems/