The IMF forecasts annual growth of just 3.4% for China in 2028, exactly half the growth rate of 6.8% a decade ago.
After decades of exceptionally fast growth that reshaped global value chains, pulled millions out of poverty, and shifted the balance of global economic power, China’s impressive economic narrative has now come under severe pressure.
A multi-decade surge in economic growth powered by an excessive reliance on investment in infrastructure and residential property has led to deep imbalances in the economy. Vulnerabilities due to a rapid build-up of debt, particularly in the property sector and at the local government level, have weighed on consumers and investors and complicated the country’s attempts to transition towards more consumer-centric growth.
All of this implies that, although China’s economy is much larger than it was 20 years ago, growth in the short to medium term is likely to be significantly slower. These views were highlighted by the International Monetary Fund (IMF) in its Article IV consultation for China published last week, and is a notable risk to the global (and Australian) outlook. The IMF forecasts annual growth of just 3.4% in 2028, exactly half the rate of 6.8% a decade ago.
Even though growth projections have already been revised down, the risk of a more rapid decline is also material. Much of this risk is centred around the property sector, which accounts for 20-30% of GDP and 70% of household wealth. Recently, a Hong Kong court ordered that Evergrande, one of China’s largest property developers, and the world’s most indebted, be liquidated. Evergrande is headquartered in Hong Kong but holds 90% of its assets in mainland China. While there is uncertainty around judicial recognition of the liquidation order in mainland China, the implications for the broader economy are clearly daunting.
Evergrande’s liquidation, if executed, could weigh on ancillary industries and open the possibility that other debt-laden property developers will be subject to similar orders. The large shadow banking sector also remains vulnerable to these risks. Most of all, it is likely to weigh on already weak consumer sentiment which, in turn, is likely to drag property prices and wealth lower. Weak consumer sentiment is also reflected in subdued demand and below-target inflation – consumer prices in China have been falling for the last four months.
International tensions, doubt regarding the credibility of official statistics, and a shrinking population have all resulted in foreign investors pulling money out of China. For the first time since records began, China recorded a net outflow of foreign direct investment in late 2023. Weak sentiment and broader macro-financial concerns have also led to a sell-off in the country’s major stock index which has remained flat after a crash in late 2015.
While a combination of these risks will influence China’s outlook over the coming years, there are still some bright spots. For instance, China is now the world’s largest exporter of cars due to a surge in the export of electric vehicles. Additionally, China’s dominant role in critical minerals and the global battery supply chain position it favourably in the energy transition.
This newsletter was distributed on 8th February 2024. For any questions/comments on this week's newsletter, please contact our authors:
This blog was co-authored by Lester Gunnion, Manager at Deloitte Access Economics.
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