China’s economy is heading for a sharp slowdown

China’s economy is heading for a “generational slowdown”, says Neil Shearing of Capital Economics. Recent economic data has been “dismal”, with a slowing property market and Covid-19 lockdowns sapping growth.

Economic chaos in the West has hit the financial headlines this year, but it’s China’s structural growth challenge that could prove the more significant long-term story. On 28 September the yuan hit 7.24 to the dollar, its lowest level since 2008.

Relatively tight monetary policy and large trade surpluses had spared the yuan from the worst effects of the dollar’s dominance this year, says Nathaniel Taplin in The Wall Street Journal. An export boom helped China ride out the worst of the 2020 pandemic slump; trade has also “been one of China’s few bright spots over the past year”, with net exports accounting for a chunky 36% of growth in the first half of 2022. Yet there are signs that exports are now weakening as gloomy consumers in Europe and North America tighten their belts.

China’s economy has been paralysed by Covid-19

The World Bank has downgraded its 2022 China growth outlook from 5% to 2.8%, says Tanner Brown in Barron’s. That means that China’s growth looks set to “be weaker than the rest of the Asian-Pacific region for the first time in three decades”.

Sales in the housing market dropped by 30% year on year in the first eight months of 2022. The property slump has been exacerbated by the threat of more Covid-19 lockdowns. “Last quarter, firms told us they would not invest, borrow, or hire until their Covid-zero nightmare was over,” says research firm China Beige Book. “The nightmare continues.”

The CSI 300 stock index has fallen by 22% this year. Some investors had been betting that health measures would be eased after this month’s “all-important Communist Party congress”, where president Xi Jinping is set to secure a third term, but recent pronouncements from officials mean those hopes have “fizzled away”, says Brown.

Goldman Sachs estimates that cities accounting for roughly 25% of GDP are currently under some form of Covid restrictions, says Stella Yifan Xie in The Wall Street Journal. The bank doesn’t think China will begin easing the curbs until the middle of next year. While China has enacted modest stimulus measures, they are nothing on the scale of Beijing’s “torrential” post-2008 pump-priming, says The Economist.

Leaders don’t want a repeat of the “excess capacity... skewed pattern of production and heavy debts” they were bequeathed by that stimulus; they seem “resigned to a slowing economy”. Crackdowns on top technology innovators haven’t helped, says William Pesek in Nikkei Asia. Long-fearful of being outpaced by China, “economies from the US to South Korea need not look over their shoulders so much”.