The Chinese economy is facing a turbulent period as deflation, coupled with a lack of consumer confidence, takes a toll on its growth prospects. Shaun Rein, the founder of the China Market Research Group, warned that China is in for a “very painful economy” in the next three to six months. In his 27 years of experience in China, Rein expressed that this is the lowest level of confidence he has witnessed. Deflation, characterized by declining prices of goods and services, is exacerbating the economic slowdown and raising concerns about China’s growth trajectory. In 2023, the country’s post-Covid-19 recovery fell short of expectations, and the recent decline in pork prices, which is a significant component of China’s CPI basket, indicates the potential onset of deflation.

Despite the Chinese government’s reluctance to acknowledge the problem, deflation poses a serious threat to the economy. Rein emphasized the need to address this issue promptly. He expressed surprise at the People’s Bank of China’s decision to keep the prime rates unchanged, suggesting that lowering them could have stimulated the economy. However, the central bank maintained its one-year and five-year loan prime rates at 3.45% and 4.2%, respectively. These rates form the basis for most household and corporate loans in China and represent one of the key tools that the People’s Bank of China employs to bolster economic growth. Unfortunately, investment banks anticipate a slower expansion of China’s economy in 2024. Premier Li Qiang announced a growth target of 5% for the year, marginally higher than the 5.2% achieved in 2023. Despite China’s focus on strengthening internal drivers and avoiding massive stimulus, the International Monetary Fund predicts growth to slow to just 4.6% in 2024. Moody’s more recent report suggests a decline in real GDP growth to 4% for this year and 2025, compared to the average of 6% between 2014 and 2023.

For President Xi Jinping and the Chinese Communist Party, an economic slowdown poses a significant challenge. Rapid growth has contributed to the party’s political legitimacy, while China’s status as the world’s second-largest economy solidifies its international standing. However, Rein believes that as long as the economy sustains 5% growth, the government can tolerate a slight decline. He suggests that the focus is now on social transformation rather than restructuring the economy. The government’s aim is to create a fairer society, which explains its reluctance to implement a substantial stimulus. Rein predicts that the “new normal” will be 4-5% growth over the next 3-5 years, indicating a shift towards a slower-growth trajectory.

Troubled Sectors and Consumer Behavior

Rein points out the real estate industry as one of the sectors experiencing severe turbulence. This sector accounts for a third of China’s economic activity and has been hit hard by the government’s crackdown on debt levels among property developers. Giants like Evergrande and Country Garden have already experienced significant setbacks. Due to the fear of further price drops, potential buyers are holding off on purchasing properties, exacerbating the downward trend in the market. This cautious consumer behavior reinforces the notion that it might take China more than a decade to address the current excess inventory in the housing market.

As China grapples with deflation and a lack of consumer confidence, it faces a challenging period ahead. The government’s focus on social transformation rather than short-term growth implies that a major stimulus is unlikely. China’s growth prospects for 2024 and beyond remain uncertain, with various forecasts indicating a slowdown. However, the resilience of the Chinese economy should not be underestimated. The leadership’s commitment to social reforms and the gradual shift towards slower but more sustainable growth should pave the way for a more stable and balanced economy in the future.

The threat of deflation looms over China’s growth outlook, impacting consumer behavior and creating a pessimistic economic environment. The government’s emphasis on social transformation coupled with its aversion to massive stimulus measures suggests a new norm of slower growth. The troubled real estate sector further compounds the challenges faced by the Chinese economy. Nonetheless, with a focus on long-term stability and resilience, China has the potential to navigate this difficult period and emerge stronger in the years to come.

Real Estate

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