Despite China’s exports showing unexpected strength in April, a fall in the PMI for new export orders suggests the backlog of orders accumulated during Covid-19 has been filled. This foreshadows a slowdown in demand for Chinese goods. That imports last month fell by 7.9 per cent year on year also suggests a drop in demand for the raw materials needed for China’s factories.
Meanwhile, investment growth continues to slow, with property investments in particular falling by 16.2 per cent year on year in April. Structural concerns over the Chinese property market – such as an oversupply in the tier-2 and tier-3 cities that accounted for 88 per cent of construction in 2020 – and the continued deleveraging among property developers will be a drag on investment.
This has weighed on construction activity, with new home starts in April – the entire floor space of new housing projects begun – falling by 28.3 per cent year on year. For now, developers primarily aim to to deliver on ongoing projects, reflected in new home completions growing by 37.4 per cent year on year.
Further policy support will be needed to turn investment sentiment around properly. The introduction of the dynamic mortgage rate adjustment mechanism earlier this year has clearly failed to ignite any significant demand.
Things look rosier for consumption. The recovery continues to be driven by the shift from goods to services. Online and vehicle sales grew at double-digit levels in April, albeit benefiting from the low base last year. If the government does not ease policy further to kick-start other engines of growth, consumption is likely to be the main – or even, the only – contributor to economic growth for now.
This puts the Chinese economy on an extremely narrow and perilous path, as the high national savings rate and elevated youth unemployment may become stumbling blocks to consumption. The government must broaden China’s economic rebound to reignite both investment and consumer confidence, as the external growth environment continues to look weak.
To add to these concerns, China’s inflation numbers for April were weaker than expected and top-line editorials about slowing demographic growth have likened China’s situation to that of Japan’s stuttering economy in the early 1990s. While it is still too early to draw parallels between the two economies, the Chinese government has an important task ahead, to address these structural concerns to domestic economic growth.
It is likely to need to encourage greater investment to boost productivity growth, spur more private investment to gradually replace the heavy reliance on the property sector, and channel capital into areas such as new energy vehicles and green infrastructure, as well as encourage consumer confidence to unlock the Chinese population’s tendency to save their earnings rather than spend them.
In the near term however, there will be concerns about the sustainability of China’s post-Covid recovery, putting more pressure on the government and the central bank to loosen policy further to broaden the economic recovery, or to deploy some form of stimulus to extend the recovery in consumption.
Marcella Chow is a global market strategist at J.P. Morgan Asset Management
The news is published by EMEA Tribune & SCMP