Yet Another Raft of Discouraging Economic Numbers from China

When it comes to disappointing data, China’s economy has become the gift that keeps on giving (well, it’s the Christmas season, so gifts popped into my mind!).  The latest November numbers for inflation, or lack thereof, retail sales, trade, and capital outflows are now in, and they are all pretty bad, pointing to economy that continues to court a long-term deflationary spiral.  The one very minor bright spot was in housing prices, which continued to fall in November, but at a much slower pace than in previous months.  However, this figure must be set against the sharp downward trend in real estate investment and steep drop in housing sales in 2024 compared to just three years ago.

Reviewing the official Chinese Government November inflation data, Reuters notes that the consumer price index (CPI) inched up just 0.2% on a year-on-year basis.  This figure was below the 0.3% increase recorded for October and below the 0.5% rise forecast in a Reuters poll of economists.  The CPI fell by 0.6% on a month-on-month basis, well below the 0.3% month-on-month decline recorded for October.  Factory gate prices continued to fall in November, with the Producer Price Index (PPI) dropping by 2.5% on a year-on-year basis in November compared to a 2.9% year-on-year drop in October.  The November drop marked the 26th straight of decline for China’s PPI.    

Taken together, the latest price data indicates that the threat of deflation is alive and well in China.  As the graph below indicates, the CPI has stayed flat all year, barely moving up, while the PPI has fluctuated below the 0.0% mark.  


   

November also saw disappointing retail salesfigures.  This key consumption gauge went up by only 3% on a year-on-year basis, which was both below the 4.6 rise predicted in a November Reuters poll of economists and a marked drop from the 4.8% year-on-year increase recorded for October.  Commenting on the November retail sales data in a research note, Lynn Song, chief economist for Greater China at Internationale Nederlanden Groep, declared that the data “was a big disappointment, as retail sales … came in softer than both consensus and our forecasts.”

As was the case with the November inflation and retail sales data, the figures for China’s foreign trade last month fell belowexpectations.  In particular, imports unexpectedly fell by 3.9%, the sharpest decline in 14 months, since September 2023, reflecting ongoing anemic domestic consumption.  Exports rose by 6.7% measured in U.S. dollars from a year ago, down by nearly half from the 12.7% rise in October and below the 8.5% increase predicted in a Reuters poll of economists.

The only small green shoot in China’s November economic data came in the beleaguered housing sector.  Although new home prices in 70 cities, excluding state-subsidized housing, continued to decline in November, they droppedby just 0.3% from October.  This was the smallest decline in 17 months and marked the third straight month in which the ongoing contraction in the price of housing eased.  This latest trend suggests that the recent steps taken by the Government to bolster the real estate sector may be stabilizing home values.

Lest anyone get carried away by this latest data, several caveats need to be emphasized.  First, the nascent rebound in new home prices appears to be occurring mainlyin larger, first tier cities, particularly Shanghai, Beijing, and Shenzhen, where measures such as lifting limits on purchases of second apartments, have led to a surge in home buying.  Thus, Raymond Cheng, head of China Property Research at CGS International Securities, notes in Bloomberg News, “The recovery (in the housing market) is still fragile and not broad based,” adding, “Property markets in small cities are still very challenging with high inventory levels.”  Fitch Ratings is even more pessimistic about the long-term prospects for China’s real estate sector, predicting the property slump will drag on, with prices and sales remaining weak through 2025.  Wang Ying, managing director at Fitch Shanghai, predicts new homes prices will fall by another 5% next year, as measured by official Chinese Government statistics, while new home sales will shrink by another 10%.  Moreover, the slowdown in the fall in housing prices over the past three months has been paralleled by an ongoing declinein property investment, which fell 10.4% in the 11 months to the end of November.  Finally, it is worth noting a data point that underscores the severity of China’s property meltdown:  current home sales are just half of whatthey were at their 2021 peak.  

In addition to casting shade on China’s property market, Fitch has lowered its 2025 growth forecast for the Chinese GDP to 4.3%, down from 4.5% and substantially below than the 5.0% government growth target.  The agency also reduced its 2026 GDP growth forecast for China from 4.3% to just 4.0%.  This pessimism regarding China’s future economic prospects is also reflected in the last bit of bad November data mentioned at the outset of this post, namely capital flight out of the country.  According to official government data, capital market outflows from China reached a new high of $45.7 billion in November, with cross-border receipts from portfolio investment amounting to $188.9 billion, while payments came to $234.6 billion, the biggest monthly deficit on record.  These numbers would have certainly been even worse were it not for China’s stringent capital controls aimed at limiting capital flight from the country.

All in all, then, the November economic data for China was pretty dreadful, underscoring that its economy remains in crisis and is in need of bold government action to get it back on a sustainable growth track.  Moreover, this post has not even touched on two broader underlying worrisome economic data trends in China.  One is the continued and unsustainable rise in debt, especially local government debt.  The other is the fall in China’s long-term bond yields below those for Japan for the first time, pointing to investor bets that the Chinese economy will become mired in the deflation that overtook its Japanese counterpart in the 1990s.  I am planning on doing a deeper dive into these trends comparing China and Japan at the outset of the latter’s “last decade” vs. the one potentially staring down former.  Stay tuned!                  


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