BEIJING, CHINA – NOVEMBER 13: Illuminated skyscrapers stand in the central business district at sunset on November 13, 2023 in Beijing, China. (Photo by Gao Zehong/VCG, Getty Images)
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Deflation could soon start to hurt China’s growth, with the government expecting a “very difficult economy” to continue for another three to six months, according to one analyst covering China.
“This is something investors need to be aware of. The economy here is bad, pretty bad… really bad. I’ve lived in China for 27 years and this is probably the lowest I’ve ever seen. We’re confident,” Sean Lane, founder of China Market Research Group, said Monday on CNBC’s “Squawk Box Europe.”
“So deflation is starting to have its ugly effects. Consumers are waiting for discounts. They’re very nervous.”
Deflation, associated with falling prices for goods and services, is commonly associated with an economic slowdown, and growth prospects in China, where the post-COVID-19 recovery has already fallen short of some expectations for 2023. There are doubts about this. The fall in the price of pork, which accounts for about one-fifth of China’s CPI basket, heralded the possible arrival of deflation.
“Deflation is a serious problem. I know the Chinese government doesn’t want me to say that, but it’s something we should be concerned about,” Lane said. “So I’m a little surprised that they left the prime rate unchanged. I wish they would have lowered the prime rate to give some stimulus domestically.”
The People’s Bank of China kept its one-year and five-year loan prime rates unchanged at 3.45% and 4.2%, respectively, as expected early Monday. These are the pegs for most household and business loans in China and are one of many tools the central bank typically uses to stimulate the economy.
The decision came amid contagious expectations among investment banks that China’s economy would expand at a slower pace in 2024. The Chinese government has set an official growth target of 5% for this year, as Premier Li Qiang said at the World Economic Forum in Davos, Switzerland last year. Last week, it was announced that China’s economy will expand slightly by 5.2% in 2023.
At the time, Li emphasized that China did not achieve economic development through “massive stimulus” and “did not pursue short-term growth while accumulating long-term risks.” “Rather, we focused on strengthening our internal momentum,” Lee said.
Nevertheless, the International Monetary Fund outlined in November that China’s growth rate will slow to just 4.6% in 2024. In a more recent January 15 report, Moody’s assessed that China’s real GDP growth will reach 4% this year and 2025, up from an average of 6% from 2014 to 2023.
The economic slowdown is widely seen as a potential threat to Chinese Communist Party leader Xi Jinping, who has cultivated national political legitimacy through rapid growth. China’s status as the world’s second-largest economy has also strengthened its international foothold, making it the center of the BRICS group of emerging markets, along with China and Russia, a leading energy exporter.
But Lane said China’s economy may be able to withstand “some tough times” as long as it maintains 5% growth because of the administration’s focus on social change.
“The Chinese Communist Party doesn’t necessarily want to rebuild the economy, it wants to reform society. So it’s thinking about the bigger picture…That’s why I don’t think the government wants a big stimulus package. So, the new normal will be 4-5% growth over the next 3-5 years,” he said.
“I think we’re going to have at least another three to six months of very difficult economic conditions as China restructures or, as you know, China transforms its economy towards a lower growth, more just society. .”
Among the more volatile areas of China’s economy, Mr. Lane cited the country’s once-expanding real estate market. The market accounts for about a third of China’s economic activity and has fallen sharply since the Chinese government’s major crackdown on debt levels of mainland property developers. . Real estate giants Evergrande and Country Garden were the main victims of the crackdown.
”[Buyers] Many home buyers are saying they won’t buy this month and won’t buy this quarter, even though there is pent-up demand for homes because they think home prices may continue to fall.I’m afraid the price will drop further [of] percent over the next few months,” Lane said Monday.
These consumer actions could worsen some expectations that it could take more than a decade for China to clear its current housing glut.