Many Chinese developers have stopped or postponed construction of already sold homes due to cash flow problems. The photo is taken at a real estate construction site in Jiangsu Province, China, on October 17, 2022.
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Adding insult to injury, January PMI data released by China’s National Bureau of Statistics showed that manufacturing activity contracted for the fourth consecutive month due to weak demand.
The resulting set of lackluster data triggered a wave of skepticism about the world’s second-largest economy. For example, Allianz reverses its previously optimistic view of China by predicting that Beijing’s economy will grow by an average of 3.9% from 2025 to 2029. This has been revised down from the 5% forecast before the outbreak of the coronavirus pandemic.
Eswar Prasad, a former International Monetary Fund official, also told Nikkei Asia: “The probability of predicting that China’s GDP will one day overtake that of the United States is decreasing.”
Meanwhile, top economist and Allianz advisor Mohamed El-Erian highlighted the dire situation of China’s stock market relative to the US and Europe. Chart on Xsaid this shows a clear disconnect between all three stock markets.
However, China itself does not want to admit that its economy is in tatters. Chinese leader Xi Jinping said on New Year’s Eve that China’s economy had grown “even more resilient and dynamically this year.”
Buoyed by this optimism, it’s no exaggeration to say that there are signs of hope in the beleaguered economy, but perhaps not enough to sway the bears. For example, factory activity in China expanded for the third straight month in January, but the country’s luxury goods sector appears to be rebounding sharply.
Such data has sparked a bullish debate among investors, suggesting that the consensus on China is clearly not unified.
Nobel Prize winner Paul Krugman has been one of the most bearish voices on China, saying the country is entering an era of stagnation and disappointment.
Krugman said in a recent New York Times op-ed that China was supposed to have an economic boom after lifting strict “zero coronavirus” measures. But it did exactly the opposite.
Krugman argued that the country faces headwinds from every corner, from poor leadership to high youth unemployment. And Krugman warns that the country’s economic stumbling blocks are not isolated and could potentially be a problem for everyone.
China’s well-known real estate problems are at the heart of Wall Street’s bearishness on the Asian country.
The International Monetary Fund said China’s housing demand is expected to decline by 50% over the next decade.
IMF chief Kristalina Georgieva, speaking at the World Economic Forum in Davos last month, said China’s real estate sector needed a “fix” and that Beijing needed structural reforms to avoid a decline in growth. Stated.
Meanwhile, Kyle Bass, a prominent hedge fund manager and founder of Dallas-based Hayman Capital, believes the country’s heavily indebted real estate market is causing a wave of defaults among public developers. He said there was. This is a problem given that China’s real estate market may account for one-fifth of the country’s GDP.
“This is exactly like the U.S. financial crisis on steroids,” Bass said, referring to China’s real estate market in default.
He added: “No matter how much regulators say they will protect individuals from malicious short selling, China will only get worse.”
“The fundamental structure of China’s economy is broken,” Basu continued.
However, the dark image of China is not shared by everyone.
The Institute of International Finance said in a recent blog post that the Chinese government has the policy capacity to push the Chinese economy towards its growth potential, and is sticking to the above consensus forecast of 5% growth in 2024. . But that view depends on sufficient stimulus on the demand side. China’s latest GDP figures for the last three months of 2023 came in at 5.2%, lower than analysts expected.
At the same time, Marko Papic, partner and chief strategist at Clocktower Group, expressed optimism for Chinese stocks in the short term. In an interview with CNBC on February 7, Papic said he expected Chinese stocks to rise by at least 10% in the coming days as authorities signaled support efforts to shore up the sluggish stock market. .
“Chinese stocks are likely to rise 10-15% in the next few business days,” Papic said.
JPMorgan Private Bank also outlined a China bull market scenario in a recent post. “Despite weak stock market sentiment and persistent problems in the real estate market, some sectors of China’s economy are also proving resilient,” the paper said.
The bank said China’s important role as a global manufacturer is unlikely to weaken, adding that cyclical demand for Chinese exports is likely to remain.
Looking ahead, China has hurdles to overcome. However, it remains to be seen whether it has that much firepower.