China’s economy falters across all sectors

Economic activity across all sectors weakened and the unemployment rate among the youth crossed 20 percent.

The weak data indicates that the economic recovery is waning even after the lifting of Covid curbs late last year.

Even the reported data is misleading as it was boosted due to a lower base of comparison from last year, when Shanghai was in lockdown.

Industrial production for April rose by 5.6 percent, retail sales by 18.4 percent and fixed asset investment by 4.7 percent as compared to the 10.9 percent, 21 percent, 5.5 percent growth expected by economists and businesses, respectively.

Prices at the factory gate showed a deflationary trend as the producer price index (PPI) fell to its lowest level, in three years, to minus 3.5 percent, the 7th straight month of producer deflation and the steepest fall since May 2020 amid weakening demand and moderating commodity prices.

Property investment contracted by 16.2 percent in April as compared to 7.2 percent drop in March.

The latest data indicated the unemployment rate for youth between ages 16 and 24 in April stood at a record 20.4 percent, which potentially would hit consumer confidence of recovery of income and job security.

With 11.6 million college graduates set to enter the workforce this year, youth unemployment could increase further in the coming months.

According to Louise Loo, lead economist at Oxford Economics, this is both an ‘economic and social risk’ for China. Unsustainable youth unemployment could become a threat to social stability.

The loss of confidence in the economy has also resonated in weakened market sentiment. The faltering economic recovery has spooked investors with the Shenzhen Composite Index down by 4.67 percent from April and 9.5 percent from its peak in early February.

According to the Institute of International Finance, foreign investors sold nearly USD 4 billion of Chinese stocks in April, the first outflow in six months.

Growth in foreign direct investment (FDI) into China during the January-April period was less than half of that in the January-March period.

FDI into China increased by 2.2 percent in the first four months of 2023 as against 4.9 percent in the first three months of 2023 and 6.1 percent in the first two months of 2023.

The country faces a tough job attracting investors to China given the fragile growth picture and geopolitical tensions surrounding Taiwan, Ukraine, tech espionage and sanctions.

China’s growth in exports in April 2023 fell to 8.5 percent from 14.8 percent growth in March 2023, while imports fell by 7.9 percent in April as compared to 1.4 percent fall in March amid weakening domestic demand and lower commodity prices.

Fall in domestic and external demand and geopolitical factors are likely to impede the country’s trade in the coming months, which would increase the risks posed to the economy, especially given the frail recovery from the severely disrupted economic activity by Covid restrictions.

Due to the weak April data leading to negative sentiments among investors and exporters, the Yuan weakened past the key threshold of Yuan 7 to a dollar in both onshore and offshore trading on April 17.

While the offshore Yuan fell by 0.3 percent to 7.0201 per dollar, the onshore currency dropped as much as 0.4 percent to 7.0026.

The currency has fallen more than 4 percent from its high in January as expectations of a post-pandemic rebound faded.

According to analysts at Societe Generale, the Yuan is likely to fall to 7.30 per dollar this year, a record 15-year low.

The economy is likely to face more headwinds in the remaining part of the year as the Government slows fiscal and credit growth due to rising unsustainable debt support, weak recovery in the housing market and diminishing demand for Chinese exports due to high inflation and rising interest rates in China’s major markets.

Moreover, the economy would face headwinds from recent failures of Western banks, rising global borrowing costs, high domestic debt and the Ukraine war.

If the Chinese industrial activity and property market do not recover, it could impact global commodity prices.

Already prices for nonferrous metals like copper and zinc, used in a range of construction and industrial applications, have slumped this month on concerns that there could be surplus production if Chinese demand does not recover.