BEIJING, CHINA – NOVEMBER 13: Illuminated skyscrapers stand in the central business district at sunset on November 13, 2023 in Beijing, China. (Photo by Gao Zehong/VCG via Getty Images)
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Deflation may soon begin to bite Chinese growth as Beijing looks at another three to six months of a “very painful economy,” according to an analyst who covers the country.
“This is something that investors need to be careful about. The economy here is bad, it’s very… it’s very bad. I’ve been in China for 27 years and this is probably the lowest confidence I’ve ever seen.” Shaun Rein, founder of China Market Research Group, told CNBC’s “Squawk Box Europe” on Monday.
“So deflation is starting to rear its ugly head. Consumers are expecting discounts. They’re very nervous.”
Linked to falling prices for goods and services, deflation is generally associated with an economic slowdown — raising questions about growth prospects for China, whose post-Covid-19 recovery is already falling short of some expectations in 2023. The squeezed prices for pork – which makes up about a fifth of China’s CPI basket – heralded the likely arrival of deflation.
“Deflation is a serious issue, I know the Chinese government doesn’t want me to say it, but it’s an issue we have to worry about,” Raine stressed. “So I’m kind of surprised that they kept the key rates unchanged. You know, it would have been nice if they had lowered them to try to get some stimulus into the country.”
Earlier on Monday, the People’s Bank of China kept its one-year and five-year prime lending rates at 3.45 percent and 4.2 percent, respectively, in line with forecasts. These are the pegs for most household and business loans in China and are one of several levers the PBOC usually pulls in an effort to stimulate the economy.
The decision comes amid contagious expectations among investment banks that China’s economy will expand at a slower pace in 2024. Beijing has set an official growth target of 5 percent this year, with Premier Li Qiang telling the World Economic Forum in Davos that Switzerland, last week that the Chinese economy expanded by a marginally higher 5.2% in 2023.
At the time, Li stressed that China did not achieve its economic growth through “massive stimulus” and “did not pursue short-term growth by accumulating long-term risks.” “Rather, we focused on strengthening internal factors,” Li said.
Still, the International Monetary Fund outlined in November a forecast for China’s growth to slow in 2024 to just 4.6%. In a more recent report on January 15, Moody’s estimated that China’s real GDP growth will reach 4% this year and 2025, up from 6% on average between 2014 and 2023.
The economic slowdown is widely seen as a potential threat to Xi Jinping, whose Chinese Communist Party has cultivated national political legitimacy through rapid growth. China’s position as the world’s second-largest economy has also cemented its international footing, making it and heavyweight energy exporter Russia the centerpiece of the BRICS grouping of emerging markets.
However, Raine says Beijing may face a “slightly difficult period” as long as the economy maintains 5% growth as the government focuses on social transformation.
“The Chinese Communist Party doesn’t necessarily want a restructuring of the economy, it wants a reform of society, so it’s a much bigger picture… So I don’t think the government will want a major stimulus, so the new normal will be 4 -5% growth over the next 3-5 years,” he said.
“I think you’re going to face at least another 3-6 months of a very painful economy as China restructures or as China, you know, transitions its economy to a slower growth, fairer society.”
Among the scariest sectors of the Chinese economy, Rein singled out the country’s once-buoyant property market, which accounts for about a third of China’s economic activity and has fallen sharply since Beijing’s broad crackdown on debt levels of mainland property developers country. . Property giants Evergrande and Country Garden have become the main victims of the crackdown.
“[Buyers] think that home prices may continue to fall, so even if there is limited demand for housing, many home buyers are telling us, we’re not going to buy this month, we’re not going to buy this quarter, because I’m afraid prices will drop another pair [of] percent in the coming months,” Raine said Monday.
Such spending behavior could fuel some expectations that China could take more than 10 years to liquidate the current surplus in its housing stock.