Chinese Economic Data Raises Concerns

Less than a year after finally removing a wide raft of COVID-era restrictions and rejoining the global marketplace, it seems that China is facing strong economic headwinds. The latest data coming out of the world’s second-largest economy seem to be casting a shadow over prospects for this global power’s post-pandemic recovery.

Dragon Returning to Hibernation?

The over three years since the initial outbreak of the COVID-19 virus in Wuhan may have been tumultuous for the country’s economy and citizenry alike. The Chinese Communist Party, which holds the reins of power in the world’s second-most populous nation, held to a controversial ‘zero-COVID’ policy in recent times, which disrupted major global manufacturing chains. However, with many of the most restrictive measures lifted towards the end of 2022, some may have looked toward China’s return to the global economic stage with optimism.

However, despite initially rosy predictions, it seems that growth in China may be sluggish. Despite an uptick in gross domestic product (GDP) growth to 4.5% in the first quarter of 2023, recent data releases have shown industrial production, retail sales, and home purchases all hitting a slowdown.

Accordingly, the general market mood with regard to the Chinese economy could be turning less optimistic. Some forecasts for the near-term trajectory of economic expansion in the country have been trimmed down due to these latest figures.

Since the beginning of May, the yuan has lost ground against the greenback, with the USD/CNH pair rising 2.3% to nearly 7.09 as of the time of writing. Furthermore, the price of key Commodity Copper (HG) has fallen nearly 6% over the same period, partly due to declining demand from Chinese factories as growth lags. 

Regulations Cast Long Shadow

In the context of China’s economic growth, some analysts are emphasising the role of government policy among the forces shaping the market. One key figure that has been persistently on the low side in recent times has been private investment.

This dearth of privately-held wealth flowing into the economy could perhaps be due to the increasing regulation implemented by the government on domestic technology firms. In recent years, Chinese regulators have increased restrictions on homegrown firms with companies like Alibaba (BABA) and Tencent (0700.HK) among the most directly affected. Among these new rules include stringent requirements for firms seeking listing abroad and limitations placed on the gaming time of the country’s youth. With the government so deeply involved in business affairs, investors may be reluctant to invest cash into Chinese companies.

Generation Struggles to Find Its Footing

Among the perhaps most worrying of the recent Chinese figures released are those that show youth unemployment reaching above 20%, four times the equivalent figure for the general populace. The country’s massive and rapid economic growth in the past half-century has been accompanied by an expansion in levels of post-secondary education. However, many of those graduating from Chinese colleges and universities have been unable to find positions commensurate with their qualifications.

Even as the Chinese population as a whole ages due to low fertility rates, dissatisfaction may be growing among the younger generation as professional careers seem beyond reach. The Chinese Communist Party may already be intervening to head off widespread dissatisfaction among the youth, with pledges to expand training programs and increase hiring at state enterprises having been made. However, it remains to be seen whether the nation’s service sector will be able to absorb the newest graduate cohorts. (Source:CNBC)

Stormy Waters Ahead?

With structural issues mounting, some are predicting that China could be headed for an extended period of lower GDP growth. More and more Chinese are headed for their retirement years, shrinking the productive workforce, and foreign investors seem less keen to prop up the country’s economy than in years past.

Accordingly, the International Monetary Fund foresees annual growth rates reaching downward to 3% by the end of the decade, less than half of the levels seen during China’s boom years. The aforementioned latest data regarding the Chinese marketplace may not serve as a source of encouragement either.

All in all, the road ahead for this global economic superpower is far from clear. Whether the Chinese dragon can awaken once again remains to be seen.