Car production hit records in China last year. Restaurants and hotels were increasingly full. New factory construction rose.
However, China's economic strengths mask its weaknesses. The significant discounts helped increase car sales, especially electric cars. Diners and travelers chose cheaper dishes and less expensive hotels. Many factories are operating at half capacity or less due to weak demand within China, and are working to export more to compensate.
China's economy grew by 5.2 percent last year, rebounding after nearly three years of strict “zero Covid” anti-pandemic measures, China's National Bureau of Statistics announced on Wednesday. During the last three months of the year, production rose at an annual rate of 4.1 percent.
In the long term, China's growth is slowing. High debt, a housing crisis that has undermined confidence, and a shrinking and aging workforce are all affecting output.
Western economists expect growth to reach 4.5% or less this year, which is not the result of cyclical contraction, but rather the result of a grinding decline that may continue for many years, which economists call chronic stagnation. Prices are gradually falling to an extent not seen in China since the shock caused by the global financial crisis in 2009, a phenomenon known as deflation that can lead to the bankruptcy of highly indebted households and companies.
“The long-term stagnation — essentially a chronic excess of savings leading to slow growth, deflation, asset bubbles and financial stress — has moved from the Western Hemisphere to China,” Lawrence Summers, a former Treasury secretary, said in a recent interview. Week in Shanghai.
Heavy debt, and the exorbitant interest payments it requires, limit China's room for maneuver. Since the financial crisis, central and local governments have responded to economic weakness by spending more on new roads and other infrastructure projects, and by providing more loans to manufacturers in favored industries. This stimulated growth but led to a continuing rise in debt, especially at the local level.
Last month, credit rating agency Moody's issued a negative forecast for the Chinese government's financial health. Another agency, DBRS Morningstar in Chicago, in November lowered its rating on Chinese government debt.
Rohini Malkani, senior vice president of sovereign debt ratings at DBRS Morningstar, expressed concern that total debt in the Chinese economy now exceeds three-year economic output — a higher level than in industrialized nations such as the United States.
“Over the past 15 years, this number has doubled,” she said, compared to even the rapid growth in the country's production.
Zhang Jun, dean of the School of Economics at Fudan University in Shanghai, said in a statement Commentary distributed by the “East Reads” newsletter. In Beijing, the Chinese government has become less willing to stimulate the economy through borrowing and infrastructure spending. As a result, he wrote, “I increasingly feel that a slowdown in growth is inevitable.”
The economy's performance last year was roughly in line with the consensus of 5.3 percent in a survey of economists conducted by Chinese news organization Caixin last week. The economy also achieved the government's target set last March, which was for growth to reach about 5 percent. Last year's increase was “about 5.2 percent,” Premier Li Qiang said Tuesday at the World Economic Forum in Davos, Switzerland.
Many investors had hoped China would increase its economic stimulus, but Mr. Li stressed on Tuesday that China achieved growth last year without doing so. The stock market in Shanghai fell 0.8 percent, and stocks in Hong Kong fell 2.6 percent after the report was released.
“The national economy has witnessed a momentum of recovery, high-quality development has progressed steadily, and the major expected goals have been well achieved,” Kang Yi, commissioner of the National Bureau of Statistics, said at a press conference.
Today, Wednesday, the Central Bureau of Statistics resumed publishing the unemployment rate for people between the ages of 16 and 24 years, which it had stopped last summer after the youth unemployment rate reached 21.3 percent in June. The rate was 14.9 percent in December, partly reflecting lower youth unemployment in the winter as last summer's graduates find work or enter further education.
Mr. Kang said the agency no longer considers many unemployed students who may be looking for part-time or short-term jobs while in school.
Last year's performance represents a significant rebound from 2022, when the economy grew by just 3 percent. A two-month coronavirus lockdown in Shanghai in the spring of 2022 disrupted production across much of central China and led to a sharp nationwide decline in consumer confidence, which has remained low.
Many economists expected 2023 to see a significant recovery from such a weak base. But after a strong start, spending has declined. Housing prices have fallen, making families feel less financially secure. Beijing has weakened the country's social safety net. Among other measures, policymakers a year ago ended a broad unemployment insurance program created during the pandemic, to pressure people to find jobs.
All but the wealthiest households were closely monitoring their spending. Many restaurant owners complained about the sharp drop in average tabs, while hotel executives expressed concern that travelers were opting for less expensive rooms.
About 6,000 restaurants have closed in Shanghai during the pandemic, but another 7,500 have opened in the past year, said Chris St. Cavish, a food critic and industry analyst in the city, China's most populous. The growth in this industry has occurred almost entirely between inexpensive cafés that charge less than $14 per person and upscale restaurants that charge up to $1,000 per person.
“Central is a tough place for a restaurant right now,” Mr. Saint Kavish said.
The greatest worry about China's economy next year is the same as it has been in each of the past two years: What might happen if the country's housing market collapses? Existing homes are already selling for about a fifth less than at their peak in the summer of 2021, when buyers might be found at all. The pace of transactions slowed down.
The most severe effects of real estate problems have been seen in developers' struggles to raise money and start new projects. Investors are concerned that as developers finish work on previously promised apartments in the coming months, construction volume may decline sharply.
Tao Wang, chief China economist at Swiss bank UBS, said the long decline in construction activity is not over, although activity is unlikely to decline. She added, “There is a risk that housing prices will fall further and that household confidence will be further damaged.”
China's state-controlled banking system has rapidly shifted its priorities in the past year. A small number of loans are offered to real estate developers and home buyers. Instead, loans to industrial companies to build factories increased.
Investment in manufacturing rose by 6.5 percent last year, while real estate development fell by 9.6 percent, the government said on Wednesday.
Much of the growing factory production is sold abroad. China's trade surplus in manufactured goods is equivalent to about 10 percent of the country's economic output. Exports fell last year in dollar terms because the Chinese currency weakened largely, although it has resumed rising since November and could rise further. Multinational retailers are winding down the sale of excess inventories they accumulated at the end of the pandemic and are starting to place new orders.
“China's exports are likely to explode to the upside,” said Hayden Briscoe, a senior strategist at UBS Asset Management.
All over China, car factories are being built frantically. Car exports rose by 58% last year, and China overtook Japan to become the world's largest car exporter.
The question now is how to convince Chinese families to stop depositing so much of their income in bank accounts and start spending again. “Dealing with the chronic surplus of savings may be China’s biggest macroeconomic challenge over the next decade,” Summers said.
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