The ‘boomy’ talk about the Chinese economy is a sham

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The writer is president of Rockefeller International

Something is rotten in the Chinese economy, but don’t expect Wall Street analysts to tell you.

There has never been a greater disconnect, in my experience, between some of the more optimistic views of investment banks on China and the tenuous reality on the ground. Perhaps reluctant to back down from their calls for a reopening boom this year, economists on the sell side are still sticking to their forecasts for gross domestic product growth in 2023, now expecting it to be well above 5 percent. That’s even more optimistic than the official target and totally out of line with the bad news from Chinese companies.

Hopes for a reopening boom were based on the premise that, once released from lockdown, Chinese consumers would spend heavily, but business reports show no sign of this. If China’s economy were to grow at 5 percent, then, based on historical trends, corporate revenue should grow faster than 8 percent. Instead, revenue grew 1.5 percent in the first quarter.

Corporate revenues are now growing more slowly than officially reported GDP in 20 of China’s 28 sectors, including consumer favorites from autos to home appliances. Weak revenue, in turn, is depressing earnings at consumer goods companies, which normally track GDP growth closely but contracted in the first quarter. Instead of a race to reopen, the MSCI China stock index is down 15 percent from its January high and consumer discretionary stocks are down 25 percent since then.

If the analysts were right and consumer demand was picking up in what one described as a “booming” economy, imports would be strong. Imports fell 8 percent in April. When retail sales and industrial production came in well below analyst estimates last week, one blamed this failure on “seasonal adjustment,” as if spring had come unexpectedly this year.

China’s credit growth is also weakening, rising to just 720 billion yuan ($103 billion) in April, half what forecasters had expected. Chinese consumers’ debt service burden has doubled in the past decade to 30 percent of disposable income, a level three times higher than in the US Many young Chinese need a job before they can join to a spate of spending: Unemployment among urban youth is rising and last month topped 20 percent.

These facts point to the source of the rot. Since 2008, China’s economic model has been based on government stimulus and rising debt, much of it pouring into property markets, which became the main engine of growth. With debts so high, the government was much more dovish in its stimulus spending during the pandemic.

Earlier this year, the Chinese had accumulated excess savings during the pandemic equivalent to 3 percent of GDP. The comparable figure in the US was 10 percent of GDP. While the US got a big reopening boost from the stimulus, China didn’t this time.

A growth model dependent on stimulus and debt was always going to be unsustainable, and now it has run out of steam. Much of the stimulus over the past decade has flowed through local governments in China, which have used their own “financing vehicles” to borrow and buy real estate, propping up property markets. Those vehicles are quickly running out of cash to finance their debts, which is also holding back their investment in real estate and industry. Industrial sectors are slowing faster than the consumer-related businesses at the center of the reopening story.

Although Beijing is still targeting 5 percent growth, its potential has been halved. GDP growth potential is a function of population growth and productivity: China’s negative population growth means fewer workers are entering the workforce, and heavy debt reduces output per worker.

China’s government has long been suspected of manipulating its GDP figures to achieve its growth targets. But Wall Street cheers appear to be reaching a crescendo now, as analysts who have called for a reopening boom find it more expedient to stay the course, even if it requires highly selective use of official data, than to back down.

While analysts may have little to lose from rosy forecasts, the rest of us do. Boomy talk has contributed to investors losing hundreds of billions of dollars in China in the past four months. Furthermore, global growth may turn out to be weaker than expected in 2023, as the hope is that the US recession will be offset by China’s reopening boom, which may never come. It’s time to expose this charade before the consequences get worse.