Weekly Economic Commentary

Is China's economy in bad shape?

Chief Economist Eugenio J. Alemán discusses current economic conditions.

There has been lots of speculation lately regarding China’s economic “decline” or potential economic “perils,” so much so that newspaper articles about the coming demise of China’s miracle economic growth over the previous decades continue to take (our) time away from other, perhaps, more important topics. This has also added to our time spent in trying to make sense of China’s involvement and support of the continued development of an expanded BRICS alternative to a U.S. “driven” global economy.

The flurry of articles on China’s economic demise seems to have hit the Chinese Communist party hard, so hard that even the Chinese Ambassador to the U.S. had to intervene and write an opinion piece in the Washington Post (The Chinese economy is doing better than you might think, by Xie Feng, August 30, 2023). We normally don’t spend a lot of time reading what diplomats have to say because their job is to sell their country and they will say anything to do that. Thus, we are not going to take the time to analyze what the ambassador said in that piece.

Furthermore, we are not going to get into what these economists/analysts are saying about the current problems facing the Chinese economy. At the same time, we remember the heydays when economists argued that Chinese officials were lying with the economic numbers when the economy was, according to the statistics, growing at rates of more than 10% per year. Those reports are also common today, but now the problem has been reversed and the economy is clearly having trouble growing at high rates. One of these signs has been the Chinese government's decision to stop reporting the rate of unemployment for young Chinese, as the rate of unemployment for that segment of the population continued to increase. It is never a good sign when a government decides to not publish a data series because it does not serve its purposes!

However, the biggest issues the Chinese economy has today is that the development model they chose to grow fast has probably run its course and they will have to adapt to the new realities. The development model has followed what economist Arthur Lewis called “unlimited supply of labor,” which meant that the Chinese economy could draw an unlimited supply of labor from its agricultural sector – which has low to negative productivity – into the industrial regions and keep wages relatively low while experiencing a large increase in productivity in the industrial sector.

At the same time, the country pursued a policy of subsidies that benefited several exporting sectors while it also pursued an immense infrastructure effort to integrate different parts of the country. This process was followed by a large push to build new cities and buildings that would accommodate this internal migration.

However, this process slowed to a trickle and the country has been facing an infrastructure spending slowdown as well as home overbuilding and this has contributed to the slowdown in economic activity.

At the same time, the Chinese don’t consume a lot, unlike other economies across the world. While there has been improvement lately, the Chinese invest about 42% to 44% of GDP1 while personal consumption as a percentage of GDP stood at close to 38%. In the rest of the world, investment as a percentage of GDP is closer to 15-20% while personal consumption as a percentage of GDP is closer to 60-70%.

However, for China, bringing up the rate at which its population consumes has been more difficult than expected. Some argue that the “one-child” policy implemented in 1979 has pushed Chinese citizens to be very frugal and to save a larger amount of income because they cannot depend on many children to take care of them in their old age. Others say that China doesn’t have a welfare system for the elderly that will reduce the need to save so much during an individual’s lifetime. Whatever the reason for such a low rate of consumption as a percentage of GDP, it continues to be one of the biggest issues that will continue to constrain the ability of the country to grow as the investment-export-led economic growth model of the past continues to face strains.

Finally, although the Chinese government has changed its “one-child” policy twice during the last several decades and now encourages families to have up to three children, the fact is that Chinese families do not have more children, and thus the Chinese population has started to fall. This will add to the economy’s pressures because the labor force will also start to come down and affect the ability of the economy to perform going forward.

In summary, yes, the Chinese economy has issues, but these issues are not insurmountable. However, some of the current trends are not easily reversed and thus these issues will continue to limit the ability of the Chinese economy to grow at a faster pace going forward.

Economic and market conditions are subject to change.

Opinions are those of Investment Strategy and not necessarily those of Raymond James and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no assurance any of the trends mentioned will continue or forecasts will occur. Last performance may not be indicative of future results.

Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Statistics. Currencies investing is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

Consumer Sentiment is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in the first quarter of 1966. Each month at least 500 telephone interviews are conducted of a contiguous United States sample.

Personal Consumption Expenditures Price Index (PCE): The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.

The Consumer Confidence Index (CCI) is a survey, administered by The Conference Board, that measures how optimistic or pessimistic consumers are regarding their expected financial situation. A value above 100 signals a boost in the consumers’ confidence towards the future economic situation, as a consequence of which they are less prone to save, and more inclined to consume. The opposite applies to values under 100.

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GDP Price Index: A measure of inflation in the prices of goods and services produced in the United States. The gross domestic product price index includes the prices of U.S. goods and services exported to other countries. The prices that Americans pay for imports aren't part of this index.

The Conference Board Leading Economic Index: Intended to forecast future economic activity, it is calculated from the values of ten key variables.

The Conference Board Coincident Economic Index: An index published by the Conference Board that provides a broad-based measurement of current economic conditions.

The Conference Board lagging Economic Index: an index published monthly by the Conference Board, used to confirm and assess the direction of the economy's movements over recent months.

The U.S. Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Index goes up when the U.S. dollar gains "strength" when compared to other currencies.

The FHFA House Price Index (FHFA HPI®) is a comprehensive collection of public, freely available house price indexes that measure changes in single-family home values based on data from all 50 states and over 400 American cities that extend back to the mid-1970s.

Import Price Index: The import price index measure price changes in goods or services purchased from abroad by U.S. residents (imports) and sold to foreign buyers (exports). The indexes are updated once a month by the Bureau of Labor Statistics (BLS) International Price Program (IPP).

ISM New Orders Index: ISM New Order Index shows the number of new orders from customers of manufacturing firms reported by survey respondents compared to the previous month. ISM Employment Index: The ISM Manufacturing Employment Index is a component of the Manufacturing Purchasing Managers Index and reflects employment changes from industrial companies.

ISM Inventories Index: The ISM manufacturing index is a composite index that gives equal weighting to new orders, production, employment, supplier deliveries, and inventories.

ISM Production Index: The ISM manufacturing index or PMI measures the change in production levels across the U.S. economy from month to month.

ISM Services PMI Index: The Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers' Index (PMI) (also known as the ISM Services PMI) report on Business, a composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector.

Consumer Price Index (CPI) A consumer price index is a price index, the price of a weighted average market basket of consumer goods and services purchased by households. Changes in measured CPI track changes in prices over time.

Producer Price Index: A producer price index (PPI) is a price index that measures the average changes in prices received by domestic producers for their output.

Industrial production: Industrial production is a measure of output of the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of gross domestic product, they are highly sensitive to interest rates and consumer demand.

The NAHB/Wells Fargo Housing Opportunity Index (HOI) for a given area is defined as the share of homes sold in that area that would have been affordable to a family earning the local median income, based on standard mortgage underwriting criteria.

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index measures the change in the value of the U.S. residential housing market by tracking the purchase prices of single-family homes.

The S&P CoreLogic Case-Shiller 20-City Composite Home Price NSA Index seeks to measures the value of residential real estate in 20 major U.S. metropolitan.

Source: FactSet, data as of 7/7/2023