Nanjing Port, Jiangsu Province. (Photo by AFP) / China OUT (Photo by STR/AFP via Getty Images)AFP via Getty Images
After a difficult 2023, the Chinese economy experienced something positive in December. Exports rose slightly and the pace of deflation slowed. However, it would be a mistake to take this news too seriously. Apart from a few meaningless statistical fluctuations, nothing in the latest news suggests much improvement in the Chinese economy. On the contrary, the recent flow of information confirms the ongoing and serious nature of China's economic problems.
At the top of the list is the ongoing deflation in China. According to the Beijing National Bureau of Statistics, consumer prices in China fell 0.3% in December from a year earlier. That's a slight improvement from the 0.5% deflation recorded in November. Still, it is difficult to make excessive use of such monthly fluctuations. The salient fact is that prices are falling and have continued on and off since March. Even more worrying are producer prices, which Chinese authorities describe as factory gate prices. These recorded a decline of 2.7% in December compared to the previous year's level, the fifteenth consecutive monthly decline.
The persistent and dramatic deflation that China has suffered can only signal one thing: insufficient demand. Analysts can analyze the numbers month after month. You can discuss which prices are pulling the averages down and which are bucking the trend. In the latest figures for December, it looks like the fall in food prices has triggered overall deflation. However, while such analyzes are useful for business people preparing, for example, for a change in their product mix, they are less meaningful for comprehensive economic analysis. The mix has changed from month to month and will undoubtedly change again next month. The main message is less about the mix and more about the persistence of deflation.
This serious demand problem is partly due to declining exports. December showed a slight increase compared to November. According to the National Bureau, all exports increased by 2.3% compared to the previous year's level. For an economy that remains heavily dependent on exports, such expansion is at best moderately encouraging. Growth at this rate is certainly a far cry from the annual export increases of over 10% seen as recently as 2022 and even early 2023. Especially for an export-dependent economy, this recent growth is indeed a small thing. The latest statistics contain even more depressing news. The only reason the numbers showed any growth at all was that the previous year's base was particularly depressed by the strict lockdown requirements of the zero Covid policy in place at the time.
What's even more telling is that the meager profits came entirely from sales in Russia. Exports to this country rose a staggering 46.9% year-on-year, a pace that Russia's struggling economy is unlikely to maintain. Exports to the United States fell 6.9% in December from a year ago, and exports to the European Union fell 1.9% from a year earlier. Exports to the Association of Southeast Asian Nations (ASEAN) were 6.14% below the previous year's level in December. These are areas where China's still heavily export-dependent economy needs sales to achieve overall acceptable growth rates. Although some see hope in the prospect of falling borrowing costs in the West, such moves are not expected until the end of 2024 at the earliest.
China's domestic demand is also unable to make up for the difference caused by falling exports. Some of the damage is reflected in the import figures, because China imports a lot of equipment and consumer goods. Imports only rose by a meager 0.2% in December compared to the previous year. This is a slight improvement from declines of nearly 10% earlier in the year, but it is hardly an economic recovery. This is particularly disappointing as Beijing has led stimulus over the past 12 to 18 months and the People's Bank of China (PBOC) has cut borrowing costs. Only very stubborn problems could thwart such support.
And the reasons for this economic weakness are obvious. The collapse in real estate development over the past two years has left China's financial markets with questionable levels of debt, which has hurt the country's ability to finance new investments – both public and private – and therefore growth. The real estate collapse has also slowed housing construction, an area that until recently was a bulwark of China's economy. At the same time, these problems have also curbed the consumer spending that China now needs, particularly given weak exports, by reducing property values and therefore the net worth of Chinese households.
A complete recession, not seen since the Asian financial crisis of 1998, could still be avoided in China. Still, the economic outlook for 2024 is hardly rosy, not least because the rest of the world appears ill-prepared for rapid growth.
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I am an economic and investment strategy consultant and chief economist at New York-based communications company Vested. I am an editor for The National Interest and a member of the Center for the Study of Human Capital and Economic Growth at the University at Buffalo (SUNY). During my long career in finance, I have held positions as portfolio manager, research director and chief investment officer. My latest book, Bite-Sized Investing, teaches beginners the basic principles of investing and reminds veterans. I have an MSS in Mathematical Economics from Birmingham University in England and a BA in Economics from the State University of New York at Buffalo.
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