Still in relative infancy, China's recovery is becoming everyone's punching bag. Dashed expectations for a strong revival have led to a round of unflattering assessments and put the nation's currency under pressure. But some recuperation from Covid Zero is better than none, and even growth this year that hits Beijing's modest target will buoy the global economy.
That risks getting lost in downbeat commentaries from economists. China may be a victim of the staggering successes of the past 30 years. A flurry of assessments last week were striking in their pessimism, some reminiscent of the disenchantment that accompanied Japan's false dawns of the past few decades.
Nomura depicted an economy "rapidly losing steam" and cut its growth forecast – weeks after raising its estimate. Barclays fretted that the revival in spending "continues to lose steam" and also trimmed projections. HSBC deployed similar language. Oxford Economics wrote of an economy "hitting the great wall." Citigroup warned of a "confidence trap." The trigger for this negativity were subpar figures on industrial production and retail sales that followed anaemic readings on inflation. But the scathing critiques point to a deeper underlying problem.
These numbers told us little that was materially new. We knew the manufacturing side of China's economy was doing it tough; exports are tipped to decline this year after reaching a record in 2022. Purchasing managers indexes have retreated. Consumer spending, though, has held up well. Luxury brands have had bumper earnings, attributed to appetite in China. Retail figures last week didn't escape the tut-tutting, despite climbing 18.4% in April from a year ago. True, they fell short of estimates, but something is off when gains of that magnitude aren't celebrated. Are flaws in China's economy being sought out in the same way bulls crowded out skeptics in the years leading up to, and after, admission to the World Trade Organization?
Citi's assessment was striking. The firm sketched a loop where deteriorating sentiment feeds upon itself:
We assumed that confidence would improve along with data akin to usual cycles, generating a broad based and organic recovery of the Chinese economy. This hope now seems misplaced, with confidence revival lagging significantly amid the "K-shaped" recovery. With the initial reopening impulse set to fade, weak confidence could become entrenched and self-fulfilling. It could be the No.1 downside risk to the Chinese economy now.
This sense of disappointment and the prospect of more stimulus from the central bank is weighing on the yuan. Still significantly influenced by the government almost two decades after a hard peg to the dollar was abandoned, the currency is down 2.6% against the greenback this quarter. It's one of the worst performers in Asia and recently weakened to less than 7 per dollar.
Even the PBOC can't (or won't) fight the market
Yuan weakens as recovery underwhelms
The People's Bank of China appears ambivalent about whether to trim borrowing costs, despite widespread speculation that interest rates will be lowered marginally in coming months. This is a very cautious approach, considering the near-microscopic levels of inflation. The central bank warned against speculation last week, but that's about managing the pace of yuan retreat, not turning it around. In a revealing presentation at the Peterson Institute for International Economics in Washington last month, PBOC Governor Yi Gang conceded that even in China the state can't hold off investors indefinitely. When it comes to intervention, the market will prevail "sooner or later."
China looks stuck. Officials have pledged support for the expansion and the data cry out for some kind of response, yet even the most pessimistic forecasters talk about very modest rate reductions, if that. Beijing is worried about a buildup of debt like that undertaken in the aftermath of the 2008-2009 global slowdown. Fair enough. But that leaves just muddling through as the most viable path.
The reach for nifty ways to describe the recovery isn't encouraging, either. It conjures memories of the early months of the pandemic when people struggled to characterise the rebound that was coming. There was the optimal "V-shaped" recovery, a less attractive "U" and an unloved "L." There was even mention of "W." The point was that the post-Covid economy was likely to be uncomfortable.
A performance that brings China close to, or a bit above, the official growth forecast of around 5% is by no means a disaster. Last year, gross domestic product moved ahead a mere 3%. With concerns about a recession in the US rising, the world could do worse than this kind of support from China. It just isn't the China we knew – or thought we knew.
There's a tendency for perceptions to remain entrenched way past their sell date. Recall the commentary about Japan that held nothing ever changes, terminal decline has set in and so on. Now, I'm struck by current bullishness. Incidentally, Tokyo is contending with inflation levels that are substantially above China's.
I've lost count of how many times I have heard over the past decade or so people intoning about how the biggest thing in their professional lives has been the rise of China. Why can't China's slowdown, its steady evolution into the problems not unknown to other major economies, be an equally compelling story? Please send me your favourite letter of the alphabet, even if "F" is a bit harsh.
Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.