China’s economy is still learning how to walk on the tightrope of a dual economy led by stark differences between manufacturing activity and retail growth. The country recently announced a GDP growth of 4.8% in the last quarter. This inflated figure begs the question of what’s driving this economy’s base health. The real estate 𝘵𝘰𝘹𝘷𝘢𝘭𝘭𝘺 is the unacknowledged albatross, weighing down more positive economic energy. Now that fiscal constraints are increasing, the National Treasury is under increasing pressure to provide stimulus for growth in a context where there are many structural challenges.
The growth figures from the Chinese economy paint a rosy picture. The 4.8% GDP growth, while sufficient to stave off immediate panic, resonates like a tired drumbeat echoing through an empty factory floor, suggesting an underlying hollowness. Industrial production, a key indicator of the country’s industrial and manufacturing prowess, jumped by 6.5% y-o-y, the highest growth rate in six months. Yet this strength does not necessarily translate into strong consumer engagement. Retail sales over that same time increased by only 3%, pointing to an alarming disconnect between what’s being produced and what people are actually buying.
Coupled with widespread retail underperformance, fixed-asset investment has dropped 0.5%, its weakest stretch since 2020. This backward trend is exacerbated by a persistent decline in home prices, which dipped further again in September. This overall decline shouldn’t be misconstrued as a sign of an imminent collapse. It does indicate a continuing leakage that undermines residential wealth accumulation and undermines consumer sentiment. The impact of these trends has been significant, reminding the global economy how delicate China’s economic recovery has been.
And the property market, usually considered a bellwether for economic good fortune, is still grappling with the squeeze. As home prices continue to fall, the sector is presenting many issues. This loss risks personal prosperity and endangers national economic security. The strain on local governments has only grown since tax revenues have flat-lined at the same time that expenditures continue to soar. The central government’s budget deficit has surged to all-time highs this year, increasing by close to 30%. Underlying this dramatic increase is the acute and continuing fiscal crisis at the local level.
To meet these growing needs, the federal government has raised investments. This policy change is intended to assist boroughs and local authorities in underwriting their own deficits. Such a strategy would likely provide only short-term respite while increasing long-term fiscal sustainability worries. That duality of China’s economy is on display as factories roar back to life, retail still can’t get its mojo back. This disparity of industrial and consumer activity begs important questions about the long-term viability of growth generated through increased production and not matched by consumer demand.
Market sentiment indicates this paradoxical reality too. The CSI 300 index jumped almost 1% just yesterday. The Hang Seng tech index soared nearly 3%, driven by enthusiasm over generative AI breakthroughs and earnings beats from the likes of Netease and Nio. The MSCI China Index, up about 30% this year, has been bolstered by a frenzy around artificial intelligence and innovation. This rally does appear to be more faith-based than fact-based.
China’s economy really is booming, but it’s a mirage. It’s blinding in its industrial strength and technological ambition, but it evaporates the first moment you look for sustainable, consumer-driven, home-grown economic development. So do rising budget deficits and deteriorating state tax revenues. These problems are in great danger of becoming the next fiscal iceberg threatening our fiscal keel.
The outlook for China’s economy remains uncertain. All this while industrial sectors continue to show remarkable resilience and growth potential, but consumer spending is far behind. Household confidence is plummeting with falling property values and a rapidly rising cost of living. It is critical that the government finds the best ways to improve consumption shifts. Failing to rectify these disparities will only exacerbate these imbalances and threaten our long-term economic recovery.