China Stuck.

Guest essay by Rebecca Patterson.

---

What follows is a “subscriber op-ed”, written by Rebecca Patterson, the former Chief Investment Strategist at Bridgewater Associates, the world’s largest hedge fund.

We’ll be posting more of these “pieces” in the future. The idea is that there are a lot of very smart, knowledgeable News Items subscribers whose views on all sorts of subjects are more than worthy of your time and attention. Rebecca’s insight into China’s economic woes is as good as it gets. As they used to say in the blogosphere: “Read the whole thing.”

---

For the last eight months, China’s leadership has provided a steady drip-feed of government intervention alongside monetary and fiscal stimulus. While those efforts have allowed economic data to stop disappointing consensus expectations and equities to bounce off lows, actual conditions and leading indicators have only marginally improved, and deflation has persisted. Perhaps more importantly, longer-term forecasts suggest more growth moderation to come, putting at risk President Xi Jinping’s goal of effectively doubling per-capita GDP between 2020and 2035.

Looking across the service and manufacturing sectors and related policy levers, it appears that China created many of its own growth limitations. A change in the economic trajectory for the better will likely need similarly meaningful changes in policy. While this month’s “two sessions” - meetings of the National People’s Congress and the People’s Political Consultative Conference - provide an opportunity for such a shift, it doesn’t seem likely based on recent remarks from the country’s leadership. Instead, more incremental reform and stimulus seem likely. A “stuck” Chinese economy may be with us for a while.

Consumer Confidence Difficult to Revive

China’s biggest challenge is its service sector. In 2007, the government decided it would take steps to increase the share of growth coming from consumer demand, both to better balance the economy between service and manufacturing sectors and to reduce reliance on foreign demand for exports.

Fast forward to today. China’s consumer-driven service sector accounts for nearly 53% of GDP (up from 43% in 2007) while manufacturing’s share of GDP has declined to 28% from 32%, according to World Bank data. It’s a goal successfully met, but one that has created a new challenge. For China to meet its growth targets, it increasingly needs a consumer with sufficient ability and willingness to spend.

Unfortunately for President Xi, the average Chinese household today doesn’t feel much like spending. Both a People’s Bank of China mid-2023 survey and more recent business confidence surveys show declines in already subdued income sentiment. Perhaps more troubling, though, is consumer confidence about financial health. Chinese households have fewer means than most western peers to grow wealth, given restrictions on foreign investing as well as a still-developing asset-management industry. For now, most wealth in China is created mainly through a combination of home values, equities and related financial products, and bank deposits. None of those options inspire much confidence these days, and it is unclear if the government will or can do enough to change consumers’ views.