On the way to the crisis or exaggerating fears of moderating activity?

The topic dominated international economics headlines this quarter: The Chinese economy, the world’s second largest, is showing a series of structural and cyclical weaknesses that raise concerns about its medium-term prospects, especially in the current context of Western divestment. in the country.

The downside indicators are numerous and cover multiple areas, but there are also those who put the data in context, considering that the scenario is not as negative as it was drawn, but rather less than that when compared to the United States.

The real estate market is the most visible face of the Chinese slowdown, a structural problem that has been going on for nearly a decade.

After years of excessive construction and unproductive investments, the solvency of real estate developers has diminished in the face of lower demand and lower prices, leaving more than half of the companies in the sector in a state of poor financial sustainability in the world. end of 2022, with interest costs exceeding earnings before interest, taxes, depreciation, and amortization (EBITDA).

With the demographic decline and the abnormally high propensity to save (compared to the rest of the world’s economies), structural problems quickly became apparent at the economic level. On the one hand, youth unemployment reached absolute records in June, when 21.3% of urban youth were unemployed – in response, the Chinese authorities stopped disclosing the indicator.

On the other hand, the recovery in consumption after the reopening, with the end of the epidemic restrictions, was less strong than previously thought, which led to lower prices and deflation in the country. Retail trade continued to grow in July, but below expectations: compared to the same period last year, the increase was 2.5%, lower than the 3.1% in June and the 4.5% expected by the market; Series, the index fell 0.06%, close to stagnation.

data in context
However, there are those who note an underlying trend in the economy that is less negative than it appears. Jenny Zheng and Zhi Yi Ang, analysts at AllianzGI, recognize the “disturbing picture” created by the July macro data, but contextualize it and argue that what was observed is just “moderation in activity”.

“For us, the numbers do not indicate another decline in economic momentum, but rather a continuation of the trend that we have seen in recent months,” write AllianzGI analysts. The first sign is in retail: although the July data disappointed, “several sectors remain strong”, such as services and other high-frequency indicators.

Likewise, the slowdown in household credit demand in July “must be seen in the context of the record high in the first quarter”, so “the suggestion of a sudden deterioration in China’s credit needs seems misleading”. Added to this is weak central government bond issuance, which AllianzGI analysts estimate will recover gas in the rest of the year.

Louis Vincent Geoff, co-founder and CEO of Gavecal, adds a few more factors: Being the largest or second largest importer of most raw materials in the world, “If the Chinese economy collapses, prices are expected to rise to goods Slower; Currently, the opposite is confirmed. On the other hand, despite the weakness of the yuan against the dollar, the Chinese currency made gains against the Korean currency, the won, and is close to the absolute maximum against the Japanese yen, which rules out the possibility of devaluing the currency to achieve exports. More desirable compared to regional competitors.

Another factor stands out: Compared to long-term US Treasuries, Chinese bank stocks have crushed returns over the past 12 months, reaching gains of 6.7% versus losses of 17.05% in 2018. bonds American.

“What kind of financial crisis would cause banks in the affected country to outperform US Treasury bonds by more than 20%? It would be completely unknown,” says Louis-Vincent Jaffe. More: Since the beginning of the pandemic crisis, “Chinese bonds have long outperformed Long-term US bonds at 35.3%,” another aspect that will have no precedent in an emerging economy in crisis.