WSJ: China’s Economy Faces a Sour End to the Year

Dec, 01, 2023 Posted by Gabriel Malheiros

Week 202343

A brief rebound in China’s struggling economy showed worrying new signs of flickering out, heaping pressure on Beijing to take bolder steps to rev up growth.

Factory activity slid deeper into contraction in November as domestic and foreign orders dried up, while, in an ominous sign for consumer spending, activity in the services sector shrank for the first time this year, according to business surveys released Thursday. Only construction registered any expansion compared with the previous month as government spending on infrastructure increased.

Together, the surveys show that China’s economy is in need of more government help to avoid a pronounced year-end slowdown, economists say. Businesses are finding few buyers for their goods overseas as growth slows in the U.S. and other major economies.

China’s huge real-estate sector is mired in a protracted downturn, putting the squeeze on consumer confidence and households’ willingness to spend. House prices fell in 70 major cities at a faster clip in October than a month earlier, while nationwide the amount of new home sales measured in floor space was around 20% lower than a year earlier.

China’s new home sales continued to drop in November, according to private data released on Thursday by China Real Estate Information Corp. The sales of China’s 100 largest real-estate developers totaled the equivalent of $54.7 billion for the month, down 30% from a year ago, when many parts of China were under Covid-19 lockdowns and business activities were restricted.

The November sales were also 4% lower than October, ending a short-lived period of sequential growth. Traditionally, September and October are the busiest months for property sales in China, as developers often offer discounts around the mid-autumn festival and weeklong national holiday. CRIC estimated that new home sales from the top 100 developers in 2023 will be down 15% from 2022, to their lowest level in recent years.

China’s woes add to the headwinds facing the global economy, which is being buffeted by war in Ukraine and the Middle East and a sharp rise in borrowing costs by central banks determined to tame inflation.

The survey results suggest China’s economy will likely slow in the final quarter of the year after staging a modest revival in the summer. Next year could pose an even bigger growth challenge unless the government and central bank step up stimulus to revive consumer and business confidence and boost spending and investment, economists say.

Thursday’s survey results will likely make Chinese officials “a little bit nervous,” said Louise Loo, lead China economist at Oxford Economics in Singapore. “They will probably look into today’s data and decide more [stimulus] needs to be in the pipeline.”

China’s official purchasing managers index for the manufacturing sector slipped to 49.4 in November from 49.5 in October, the National Bureau of Statistics said, marking the second month in a row when the reading has been below the 50 mark that separates an expansion in activity from contraction.

The result missed the forecast of 49.8 expected from a Wall Street Journal poll of economists. New orders at home and abroad declined, while a measure of companies’ appetite for hiring new workers weakened, indicating China’s powerhouse factory sector is feeling the pinch from a slowing global economy as well as sluggish spending at home.

A similar gauge of activity in the services sector slid to 49.3 in November from 50.1 in October. Services-sector activity had been healthier than manufacturing throughout 2023 as consumers returned to shops, restaurants and tourist spots following the dismantling of almost all Covid-19 restrictions around the turn of the year. But a hoped-for consumer boom never really took off, as the real estate crunch and high youth unemployment sapped households’ appetite for spending. Thursday’s data suggest consumers have become gloomier still.

The gauge of construction activity edged up to 55 from 53.5 previously, driven by government investment in infrastructure, a favorite tool of policy makers to lift growth when other sources of growth are lagging.

Chinese officials have taken steps to shore up the economy, with cuts to interest rates and a variety of efforts to juice the moribund property market, such as easing restrictions on home purchases in some cities.

Those measures have helped. China’s central bank as well as many economists expect China will manage to register an expansion of around 5% this year, in line with the government’s relatively modest goal. But economists say the broad weakening in activity indicates stimulus so far hasn’t been sufficient to foster a durable recovery.

“Although they have effectively put a floor on growth, we are not entirely out of the woods yet,” said Carlos Casanova, senior economist for Asia at Union Bancaire Privé in Hong Kong. “They really need to continue providing support.”

Many economists say government help should be aimed at the housing market. Stabilize the property sector, they say, and consumer confidence will return. Options include further loosening restrictions on purchases originally aimed at quelling real estate speculation, and prodding banks to lend more to healthier developers so they can complete unfinished projects.

Some economists say the government should also consider direct handouts to households to get them spending, while others advocate financial assistance for small and midsize businesses that are finding the current environment much tougher than large firms and state-backed companies. Many economists expect China’s central bank to cut interest rates further or tweak other policy settings in the coming months to encourage more borrowing.

The piecemeal approach to stimulus adopted so far reflects the wariness of China’s Communist leadership to big-ticket policies since a blowout package in 2008 fueled a property bubble they are still dealing with today. Leader Xi Jinping has also spoken of his aversion to Western-style handouts to juice demand, believing them wasteful, preferring instead to focus on building roads and factories and other supply-enhancing measures.

As well as its short-term difficulties, China’s economy is also facing longer-term challenges that are starting to bear down on its capacity to keep growing at the kind of pace it has managed for years. They include skirmishes over trade and national security with the U.S. and its allies, and a rapidly aging society.

Officials are also trying to pull off a difficult rebalancing of China’s economy toward a model where growth is driven more by consumption and sectors such as advanced manufacturing and less by heavy investment in real estate and infrastructure, a potentially painful transition that implies a spell of weaker growth as the economy adjusts.

In a recent speech in Hong Kong, People’s Bank of China Governor Pan Gongsheng said China’s ongoing economic transformation “will be a long and difficult journey, but it is a journey we must take.”

Xiao Xiao in Beijing and Cao Li in Hong Kong contributed to this article.

By Jason Douglas for the Wall Street Journal

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