Although it tries to move stealthily, each step of the Chinese elephant inevitably resonates with the rest of the world. In the context of the sluggish economy of the Asian giant, the figures had encouraged economists to believe in a certain recovery driven by a notable industrial boom and notable exports, beyond the persistent weakness of domestic demand and the country’s eternal real estate problem. Now, This impulse seems to dissolve like sugar inside a Chinese teahouse and the sudden paralysis sends an ominous warning to the global manufacturing sector amid recurring recession fears after the latest US sneeze with its jobs figures.
“Almost exactly a year ago, we were talking about the roadmap to a recession and how the market was wrongly pricing in a near-term recession through 2025. This spring, we also talked about the growing pickup in inflation and the surge in manufacturing, as credit growth never really supported a return to the more cyclical sectors of the economy,” the market strategist wrote in his latest analysis. Andreas Steno Larson, former Nordea. But the story continues.
“At one point in the first half of this year, we started to get a little concerned about the dynamics that were emerging, but we are now seeing clear signs of a reversal, particularly in China. As a result, we are increasingly convinced that the industry rebound and inventory build-up in the first half of 2024 was a hoax,” says Steno, who constantly uses the expression head fake (a basketball dribble in which the opponent is faked by moving his head to feign a change of address).
“Judging by the export figures and activity in China, We have seen significant deception with the build-up of export and manufacturing momentum ahead of the tariffs.and now we find ourselves on the other side of this anticipation, which means that both are normalizing/regressing at a rapid pace,” explains the expert, referring to the battery of customs duties on Chinese products announced in the United States by the Biden administration, promised by Trump during the electoral campaign and applied by Brussels in electric cars.
The experts of JP Morgan joins this rhetoric in their latest weekly report in which they analyze precisely the unusual weakness of the Chinese economy: “Several forces are affecting growth, the two most important being the continued slowdown in the real estate market and the weakness of consumption. Both are a consequence of political decisions: a real estate policy that has cushioned the price correction and exacerbated the decline in real estate transactions and investments, and a political stance that has favored production over consumption,” estimate the economists of the American bank. Today, China is paying for these decisions and its economy is stopping quickly and by surprise.
“China suddenly stopped and this will probably be a warning signal for the outlook for the manufacturing sector,” warns Steno Larsen, accompanying his argument with two quite revealing graphs. On the one hand, the one that includes copper exportswhich reached a historic peak in May/June close to 250,000 tonnes and has since fallen below 150,000 tonnes. On the other hand, the Beijing air pollution indicator as a thermometer shows that China’s manufacturing industry has collapsed in recent months, bringing the index back to 2021 levels, with production almost at a standstill due to the harshest covid lockdowns.
Another piece of information that reveals a weakness, even greater than that of the official data, is the “decline” of oil imports from the “Asian giant”, which has sounded the alarm within OPEC and other crude oil producers.
Official data published on Monday confirm this general picture. China’s official manufacturing PMI index enters contraction territory for fourth consecutive month in August, suggesting that industrial production momentum continues to slow. Both the official and Caixin PMIs suggest that producer prices have fallen further amid weak demand. The official non-manufacturing PMI also remained weak, even after accounting for summer holiday spending.
The Chinese reality is that while emerging manufacturing sectors have grown rapidly, this has not been enough to offset the drag on housing and consumption. “We do not expect these policies to change anytime soon, which is why our baseline forecasts suggest further slowdown in growth in the coming years,” JP Morgan said.
China’s economy slows down
Although over the past two years, when activity has weakened, the authorities have shown determination to increase their political and economic support in order to maintain GDP growth at a level close to 5 to 6%, “This is becoming increasingly difficult and more and more political incentives are needed. to generate the same impact on growth,” comment JP Morgan.
“So far, policy measures to rescue the real estate market and support consumption have had a rather muted impact. Budget spending has remained below the budget set in March. Although exports have supported manufacturing so far this year, higher tariffs and trade tensions will test the outlook for Chinese exports and manufacturing in general,” said Tommy Wu, economist at Commerzbank.
JP Morgan experts have downgraded growth China for this year at 4.6% given the recent slowdownwhereas in 2025, it will be very difficult for China’s GDP to grow above 4%. The current blockage also affects prices and investments. If prices do not increase, companies find it difficult to be profitable and therefore stop investing. Without investment, future growth remains uncertain. China needs its consumers to buy goods and services, thus generating new incentives to revive the productive fabric.
“Overall, the weak PMIs for July and August paint a worrying picture for third-quarter growth. GDP in the second quarter grew by only 0.7% quarter-on-quarter and 4.7% year-on-year. Growth will reach the official 5% target. This requires the government to accelerate spending and adopt bolder policy measures in the second half,” Commerzbank’s Wu said.
Deflation as a symptom
Deflation in China is a clear symptom of the weakness of the economy and the government’s inability to revive this “elephant”. It is virtually impossible to sustain an economy of this magnitude without Domestic demand contributes a very significant share to GDP. In a small economy, internal problems are easily solved by producing competitive goods and services that the rest of the world wants to buy. A small country with a population of five or ten million can function very well with the external engine alone (7.5 billion people who can buy the goods and services of this economy of five million people).
Now, when you have an economy of nearly 1.5 billion people and that represents about the world’s GDP… if your people don’t consume, you need a constant external miracle to keep the machines running at full power. China has been doing this for years, but the rest of the world’s debt to buy Chinese products could not be infinite. Now the Chinese themselves would have to want to consume locally, which is expensive for Beijing, as evidenced by the country’s deflation.
“Downward pressure on inflation implies low pricing power For businesses, profit margins and profitability have also been affected. an environment of low nominal GDP growth. Deflation/disinflation can in principle improve household purchasing power, but this has not been reflected in consumption growth in China due to weak consumer confidence reflecting falling asset prices, weak employment and wage growth, and lower expectations of near-term economic recovery,” JP Morgan warns.
Worse still, the external scenario seems rather unfavourable. “A change in US policy after the November elections could generate more headwinds in terms of customs duties and slow the export growth that has boosted the Chinese economy in the first half of 2024,” warns the American bank.
