Despite the good news, China's economy is still grim

After a troubled 2023, the Chinese economy took a positive turn in December. Exports rose, pace of deflation moderated. But it would be wrong to take this message too seriously. Apart from a few meaningless statistical movements, none of the recent news indicates much improvement in the Chinese economy. On the contrary, the latest information flow confirms the seriousness of China's economic problems.

At the top of the list is China's continued deflation. According to Beijing Bureau of National Statistics, consumer prices in China fell 0.3% in December from a year earlier. This was a slight improvement from the 0.5% inflation recorded in November. Still, it's hard to overdo these kinds of monthly moves. The main fact is that prices have been falling since March. Producer prices, which Chinese officials refer to as factory-gate prices, tell an even sadder story. These showed a 2.7% decline in December, the fifteenth consecutive monthly decline from a year earlier.

China's consistent and dramatic deflation means only one thing – insufficient demand. Analysts can enjoy analyzing statistics month by month. They can discuss which prices are dragging down the average and which are downtrending. In the latest figures for December, declines in food prices appear to have led to general deflation. But when marketers prepare for a change in their product mix, such analyzes fall short of broader economic analysis. The mix has changed from month to month and will no doubt change again next month. The main message is less in the mix than the persistence of deflation.

This acute demand problem is partly due to a decline in exports. There was a slight uptick in December from November. According to the National Bureau of Statistics, all exports rose 2.3% from the previous year. For an economy heavily dependent on exports, this kind of expansion is only encouraging at best. Growth at this rate is certainly a far cry from the more than 10% annual export growth recorded in 2022 and early 2023. For a particularly export-oriented economy, this latest development is small beer indeed. The latest statistics bear even more depressing news. The only reason the figures show growth is that the base a year ago was particularly depressed by the strict lockdown requirements of the zero-covid policies in place at the time.

More to the point, how the meager profits were entirely due to sales in Russia. Exports to the country rose an astonishing 46.9% from a year ago, a pace the faltering Russian economy cannot be expected to maintain. Exports to the US in December fell 6.9% from a year earlier, and exports to the European Union fell 1.9% from a year ago. December exports to the Association of Southeast Asian Nations (ASEAN) were 6.14% lower than a year earlier. These are areas where China's still export-oriented economy needs sales to generate acceptable overall growth rates. While some see hope for lower borrowing costs in the West, such moves are unlikely until late 2024.

China's domestic demand is by no means sufficient to cover the gap left by falling exports. As China imports more equipment and many consumer goods, some of the damage is shown in the import figures. Imports in December fell 0.2% from year-ago figures. That's a slight improvement from the 10% decline earlier in the year, but it's not the sign of an economic recovery. This is particularly disappointing as Beijing has ramped up economic stimulus over the past 12-18 months and the People's Bank of China (PBOC) has cut borrowing costs. Only the most stubborn issues can prevent such support.

The reasons for this economic softness are obvious to all. A slump in property development over the past two years has left Chinese financial markets with questionable debt, hampering the country's ability to fund new investments — public and private — and thus growth. The real estate slump has also depressed homebuilding, which until recently was a bulwark of the Chinese economy. At the same time, these problems have dampened consumer spending, which China needs right now, especially with weak exports, as home values ​​and thus the net worth of Chinese households decline.

China may yet avoid a full-blown recession not seen since the 1998 Asian financial crisis. Even so, economic prospects for 2024 are not much improved, as the rest of the world is not ready for rapid growth.

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