My Orangey Twist on a Classic Sponge Cake Recipe

 

Am I ready to take a Victory Lap on Deflation in the Chinese Economy?

Well, not quite yet, but I’m getting closer to doing that.  Back in the middle of March, I put up a blog post entitled, “Deflation is threatening the Chinese Economy.  China’s Government has not been helping matters,” which argued that the specter of deflation loomed over China.  The latest official government data on 2^nd quarter economic growth released in July shows that deflation remains a real threat to the Chinese economy.

According to a Reuters review of the latest Chinese inflation numbers from the National Bureau of Statistics, consumer prices rose 0.2% from a year earlier in June.  While this was the fifth straight monthly rise in prices, the June figure came in below the 0.4% increase forecast in a Reuters poll.  The June inflation rate was below the 0.3% price uptick over the previous year recorded for May and was the slowest price rise in three months.  The producer price index declined 0.8% in June from the previous year.  Although this fall was the smallest in 17 months, it can largely be chalked up to the very base such prices had sunk to in the middle of 2023.  Zhang Zhiwei, the chief economist at Pinpoint Asset Management, declared in Reuters, “The risk of inflation has not faded in China.”

The latest weak inflation data underscores ongoing anemic consumer demand in China.  The monthly June data on retail sales was especially disappointing, with the 2% year-on-year increase being the weakest in 18 months and coming in well below the market consensus forecast of a 3.4% rise.  Chinese households have dialed back on costly discretionary spending, eschewing fine dining at expensive restaurants, while opting for cheaper domestic destinations over more expensive foreign tourist hot spots when traveling.  This behavior has extended even to goods where demand is relatively inelastic, notably food.  Food prices fell in June, despite supply disruptions brought on by bad summer weather, underscoring soft consumer demand.  

The reluctance of Chinese households to spend freely reflects a mix of continued high youth unemployment, greater job insecurity among those employed in large private sector firms, and falling housing prices.  The unemployment rate for those aged 16-24 stood at 15% at the end of 2023; this was after officials massaged the data to bring down the June 2023 figure of 21.6% by excluding those enrolled in colleges and universities.  Last year, a record 2.6 million people, the vast majority of whom were young highly educated Chinese, competed for 39,600 government jobs, as private employers cut back on hiring college graduates.  Instead of hiring people, large private Chinese employers are letting go of staff.  A South China Morning Post survey of 23 annual reports from leading private sector firms found that more half have downsized over the past year, while others slashed personnel-related expenditures.  These companies included big names like Perfect World, ByteDance, JD.com, Kuaishou Technology, Bilibill, Weibo, and the popular ride-hailing app Didi Chuxing (China’s answer to Uber).  Many of the lucky duckies who remain employed are facing pay cuts.  Recruiter Zhaopin found that the average salary employers offered in the 38 largest Chinese cities fell by 1.3% year-on-year during the fourth quarter of 2023.  Besides having their wages squeezed by their employers, ordinary Chinese are seeing their incomes hammered by falling housing prices.  The price of apartments has fallen across China by 20% over the past year, with the decline being especially severe in lower tier cities, which remain home to over two-thirds of the country’s population.  Since housing is the main store of wealth for most Chinese, this downward trend in housing prices has left homeowners feeling poorer and less inclined to purchase goods and services. 

With the economy facing serious headwinds and ongoing deflationary pressure, people were eagerly anticipating the outcome of a recently concluded series of high-level meetings of Chinese government leaders known as the Third Plenary Session.  These sessions have typically grappled with major economic and political policy changes:  the one held in 2013, for example, seemed to embrace a commitment to further free market economic reform.  However, the 2024 Third Plenum was largely a dud, issuing a communiqué most China watchers described as vague and short on detailed policy recommendations.  As Logan Wiley of the Rhodium Group acidly declared in a Center for Strategic and International Studies “hot take” on the Third Plenum, “The package is not coherent.”  In particular, Wiley adds that “nothing is offered to stimulate sputtering domestic demand;” the Plenum instead “focuses on further expanding industrial policy for manufacturing sectors across the spectrum.”  In another take on the Third Plenum, Taiwan National Chengchi University Institute of East Asian Studies professor Wang Hsin-Hsien told Deutsche Welle that the meeting basically doubled down on the economic policy direction set in the 20^th Party Congress in 2022.  That direction put the Communist Party under President Xi’s leadership firmly in charge of steering the economy.  Wang argues that Xi is “firmly grasping the dominant role in overall policy-making” and that by adding 2029 to the timeline, the President is strongly implying that “he would still be in power by then.” 

Hum, what could possibly go wrong?!

A Further Short Follow-up Note on the Housing Crisis:

The raft of bad economic data that coming out of China over the past month has not been confined to inflation and consumer demand.  According official Chinese Government figures, in January-May of this year, property investment on a year-on-year basis contracted by 10.1%.  This fall occurred despite a slew of short-term cyclical government measures aimed at reviving the real estate industry—I review these measures in detail in my previous blog post, “Thoughts on China’s Real Estate Crisis.”

A good, pithy verdict on all this comes by way of a tweet from Alicia Herroro Garcia, Chief Economist for Asia Pacific at the French Investment Bank Natixis (she, along with George Magnus, Michael Pettis, Scott Rozelle, and, lately, Logan Wright, is one of my go-to analysts on China’s economy).  Garcia declares that when it comes to Chinese government efforts to shore up real estate, “They’ve tried it all—to be frank, it is just a bloated sector.  It’s too big.”