What you need to know
China’s economic indicators, including skyrocketing youth unemployment and declining GDP growth, are causing foreign companies and investors to lose interest.
China’s GDP growth target for this year is 5%, which is the lowest in decades. Except for skyrocketing youth unemployment, most of China’s economic indicators are trending downward. Beijing has even stopped some of the media’s reporting on the unemployment rate.
Despite Beijing’s best efforts to hide the data, foreign companies and investors are no longer attracted to China. This is bad news for China because they need foreign investors to prop up the export industries. But the increased risk and decreased profits are keeping investors away. As a result, China’s economy will most likely get worse and recovery may be far off into the future.
China’s youth unemployment rate stood at 21.3% when the government abruptly announced in August that they would no longer be tracking or reporting this data. Even this staggering 21.3% figure was a bit misleading because the National Bureau of Statistics of China excludes young people who have given up and stopped looking for work. Consequently, the real number of young people without a job could be as high as 46.5%.
Another area where Beijing seems to be fudging their numbers is in the real-estate sector which accounts for 20%-30% of the country’s GDP. According to central government statistics, new home prices have only fallen 2.4% and existing-home prices by 6% since August 2021.
Reports issued by property developers tell a different story with existing-home prices dropping by as much as 15% - 25% depending upon the city. This would explain why one of the largest developers Soho China reported that profits were down 93% for the first half of the year.
Local governments, with the exception of Beijing, Shanghai, Guangdong, and Fujian provinces, are heavily in debt and struggling to pay civil servant salaries and keep up with interest payments. Local government debt stood at $2.8 trillion in 2022. But the IMF expects so-called hidden debt attributed to local government funding vehicles (LGFV) to hit $9 trillion this year.
Along with real-estate, exports have been the bedrock of the Chinese economy. Last month, exports were down 14.5% by value year-on-year. When exports are expected to decline, factories purchase fewer inputs. As a result, China’s Purchasing Managers Index has been trending steadily downward for the past four months.
The Producer Price Index, a measure of the average change in the prices received by producers for their goods, has been in decline for the past nine months. Consumption is down and consumer prices fell for the first time in two years. When producers cannot guarantee they will sell their wares in the quantities and at the prices they planned for, production declines.
Factories also cut staff when they cut production, so unemployment rises. This kicks off a vicious cycle of pressure to lower prices because of high unemployment and more unemployment because of decreasing profits. It appears that China is slipping into a deflationary spiral which will be hard to break.
Poor economic indicators are driving investors to sell off Chinese stocks. Since hitting a high of 4,201 in January, the CSI 300 was down to 3,784 in August. This loss in stock prices is unique to China as stock in the U.S. is performing well by comparison. The S&P 500 rose by 14% during the same period.
In an attempt to prop up a falling yuan, which now stands at 7.28 to the dollar, the Bank of China has been removing dollars from its foreign reserves and buying Chinese currency on world markets. PBOC injected over $100 billion USD of liquidity into the banking system in mid-August and cut a prime lending rate to stimulate the economy. These types of aggressive expansionist policies send warning signals to investors and fuels selloffs and diversions of investment to other countries.
The Business Confidence Index was at a peak of 30 in 2021 and is now down to around 5. The Business Confidence Index is an important indicator because it represents the level of confidence in the manufacturing sector. China’s economy is heavily dependent on exports, and many of those exports are produced by foreign companies. As business confidence falls, so does foreign direct investment which is at a twenty-five-year low. This means that fewer new foreign-owned or foreign-invested manufacturing operations are being established in China.
The Business Confidence Survey 2023 published by the European Union Chamber of Commerce in China documented a significant deterioration of business sentiment. European companies report that they faced greater risk and a more volatile operating environment. Because of this, they have been reviewing their supply chains, and investment and operational strategies.
A staggering 64% of survey participants indicated that conducting business in China has grown more challenging over the past year, marking the highest figure on record. The percentage of respondents witnessing year-on-year revenue declines surged by 20 points to reach 30%. Notably, 11% of those surveyed have transferred existing investments away from China while 8% will redirect planned future investments to alternative destinations outside of China.
At the G-7 Summit in May 2023, discussions centered around “de-risking” from China. This was a softer way of saying “gradual decoupling”. The process appears to be well underway as 10% of respondents in the European Chamber of Commerce survey have either relocated or considered relocating their Asian or business unit headquarters from China to another country.
China’s attractiveness as a top-three destination for future investments has seen a significant decline of 13 percentage points within a year. A noteworthy 24% of participants have charted out strategies to partially onshore their supply chains away from Mainland China. An additional 12% have already translocated certain segments of their supply chains.
During the first two years of the pandemic, covid lockdowns drove a lot of foreign employees to abandon China, and prevented new employees from entering. Once new arrivals were permitted, jobs in China became less attractive because of fears about getting caught up in the next lockdown.
This year saw the passage of the Counter-espionage Law and the Law on Foreign Relations in the People’s Republic of China. Both laws increase the chance of being arrested for foreigners working in China. The United States Department of State issued a warning to Americans advising them to reconsider traveling to China because of the increased risk of arbitrary detention.
As the general climate in China has become more hostile to foreigners, it is no surprise that in a survey of EU Chamber of Commerce members, 16% reported that they no longer have foreign employees in China.
China’s economy is dipping into recession territory and inching toward deflation. To stop its economic decline, China will have to shore up the main drivers of the economy: real estate and exports. This will be difficult because exports may not recover with the winding down of foreign companies in China. About a third of China’s exports come from foreign-invested firms. Without foreign capital, know-how, marketing, and brand names, export volumes are likely to decrease. With fewer exports, it will be hard to tackle youth unemployment. This will continue to spill over into real estate unemployed people struggle to buy houses.
TNL Editor: Kim Chan (@thenewslensintl)
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