It appears not all is well in the Chinese economy. Of late, it is suffering from multiple headwinds. First, the Chinese construction sector, which has been one of its prime drivers of demand, is showing signs of significant slowdown since 2021. The extent of the slowdown is manifested by the debt servicing problems faced by large Chinese real estate developers. Two years ago, the Chinese company Evergrande, faced difficulties servicing its external debt. Since then, Evergrande has become the world’s most indebted property developer. Recently, it came to light that China’s biggest private sector developer ‘Country Garden’ is also facing problems in servicing its offshore bonds. In fact, over the last two years, more than half of China’s top 50 developers have gone into default.

Second, the situation is possibly more complicated because many of these real estate companies may have substantial domestic obligations within China’s domestic financial system. A large-scale problem with servicing debt is likely to have a cascading effect on the Chinese financial sector and its macroeconomy. Such an abrupt slowing down of the real estate sector indicates a lack of income growth and poor consumer sentiment in the Chinese domestic market. It also points towards a significant slowing down of the Chinese economy.

Third, the other primary growth driver of China is its exports. It is also a key player in the global value chains (GVC). However, recent data coming out of China suggests that exports from China are slowing down at a rapid rate. China’s exports have experienced a steady decline every month (on a year-on-year basis) since May 2023. Poor global demand is the likely reason for this export contraction. Also, it may be an early sign that as some companies are relocating out of China, its GVC-related exports are slowing down.

Along with these major headwinds, China faces several constraints, including a rapidly ageing population, mounting debts, and withdrawal and pause in foreign investments. On top of these, there is persistent Chinese tension with the Western world. These are well summarised by the Chinese premier when he says, “We stand against unilateral sanctions, economic coercion, decoupling, and supply chain disruption”.

The slowing down of domestic and external demand is manifested in the Consumer Price Index (CPI) of China. Amidst a global problem of high and persistent inflation, the Chinese economy shows signs of very low and sometimes negative CPI inflation. Very low inflation or negative inflation (deflation) could be indicative of the demand constraints in an economy. Such a scenario becomes alarming for an economy as producers typically respond to such a scenario by cutting down production and laying off workers, which, in turn, exacerbates the demand problem even more. Though policymakers in China are trying to address this issue through expansionary monetary and fiscal policy measures, analysts suggest that China’s price situation will likely remain subdued as the domestic demand-supply imbalance will likely continue.

Against such a grim backdrop, the IMF’s World Economic Outlook of October 2023 has forecasted that China’s economic growth will be 5 per cent in 2023, a 0.2 percentage point downgrade from its previous estimate released in July 2023. Is the IMF being too optimistic for China?

Not a low growth rate

To put this number in perspective, with inflation near zero, the 5 per cent real GDP growth rate could translate itself into a 5 per cent nominal GDP growth rate in China for 2023. With the size of China’s economy at $17,700 billion (current prices, nominal GDP), a 5 per cent growth implies that the Chinese economy is adding $885 billion to its GDP in 2023. Consider that India, with its nominal GDP of $3,730 billion will have to have a nominal growth rate of 23.7 per cent to achieve a similar amount of addition to its GDP. In other words, for an economy as big as China, a 5 per cent growth rate is not a low growth rate.

Therefore, the question is whether other data from China supports this projected growth rate by the IMF. We tracked the IMF projections on China since April 2020 (see Table).

It appears that compared to its July 2022 projections, the IMF has actually upgraded its forecast growth rate for China. However, the current round of problems with real estate companies, the sequential slowing down of China’s exports and the CPI deflation numbers are visible since early 2023. These numbers indicate that China is suffering from severe demand compression both domestically and from the external markets.

These developments do not seem to have impacted the IMF forecast of the growth rate of China by much. It is difficult to imagine that a country of China’s size, will be able to manage a 5 per cent real GDP growth rate when it is facing almost a perfect storm in its economy. Is the IMF being too optimistic? Or, does the IMF know something which we don’t?

Pal is Professor of Economics at IIM Calcutta, and Ray is Director, National Institute of Bank Management, Pune. Views are personal

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