"Dark clouds" cover China's economic recovery

Accumulating debt and consumers being more cautious in spending are "dark clouds" covering the recovery of the Chinese economy.

China's economic recovery is facing difficulties. (Source: Bloomberg)

A series of major problems weigh down

Trade restrictions implemented by the Trump administration caused China's economy to slow down in 2019. The Covid-19 pandemic that emerged in 2020 exacerbated the problem and added to the challenges for the world's second-largest economy.

After nearly three years of fighting the pandemic, life in China is now returning to normal. However, the country's economy continues to show signs of emerging problems.

Under Chinese President Xi Jinping, the country has cemented its position as a manufacturing giant while lifting its people out of poverty. In 2012, the country's gross domestic product (GDP) was $8.5 trillion. By 2022, GDP had grown to $18.5 trillion, a staggering growth of more than 100%.

However, China's economy grew by just 4.5% in the first quarter of the current fiscal year. That's an improvement from 2022, when it grew by just 3%, but still below Beijing's target of 5%.

Some observers believe China's slowdown is a sign that deeper problems may soon emerge.

China's official manufacturing purchasing managers' index (PMI) - a key gauge of factory output - fell to 48.8 in May, below the 50-point mark that separates growth from contraction, the National Bureau of Statistics (NBS) said in a statement.

The figure followed a decline of 49.2 in April 2023, reversing a three-month growth trend and falling short of the median estimate of 49.5 from economists surveyed by Bloomberg News.

In addition, official data released on May 28 also showed that profits of industrial enterprises in China fell sharply in the first four months of 2023. Companies continued to struggle with pressure on surplus profits amid weak demand as the economy did not recover as strongly as expected.

Industrial profits fell 20.6% in the first four months of this year compared to the same period last year, according to the National Bureau of Statistics of China. In April alone, the decline was 18.2% after a 19.2% drop in March.

Risk of local debt crisis

After the 2008-2009 financial crisis, China allowed cities to use local government financing vehicles (LGFVs) to borrow money to pay for infrastructure projects.

However, this is a risky game as real estate growth has been frozen for a long time and government spending has increased. These problems have increased the possibility that some local governments may default on their debt obligations, causing a broader economic crisis.

A recent analysis by Rhodium Group found that out of 205 Chinese cities surveyed, 102 were expected to struggle with debt repayments by 2022.

Goldman Sachs analysts also noted that “risks are rising locally in the world's second-largest economy, especially in less developed domestic regions.”

Real estate accounts for about 25% of China's GDP. The sector is vital to the country's economic health. But the industry remains ailing. Home sales in May were down nearly 15% from April 2023.

In addition, during the 2012-2022 period, China's public debt increased by 37,000 billion USD, while the US only added 25,000 billion USD.

As of June 2022, China's debt burden is $52 trillion, more than all emerging economies combined. Large debts are also "dark clouds" over the world's second largest economy.

Consumer confidence shaken

Amid weakening foreign investment and exports, China's biggest hope this year is for domestic consumers to increase spending.

Although people are spending more after three years of the Covid-19 pandemic, China is not enjoying the growth spurt that other economies have experienced after returning to normal.

Household spending accounts for only about 38% of China's annual GDP growth, compared with 68% in the US.

"Consumer confidence remains weak," said Pepsi Chief Financial Officer Hugh Johnston.

Additionally, foreign investors are pulling out of China - another not-so-optimistic sign,

Most analysts believe that Chinese consumers and businesses will eventually regain confidence, while Beijing will revive other sectors of the economy. "But that could take years," Yahoo News said.

Source