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Econographics August 17, 2023

The Chinese economy’s moment of macro weakness—in charts

By Niels Graham

The only thing more volatile than perceptions of the Chinese economy has been the economy itself. As 2023 began, expectations that China would once more return to breakneck growth were rising. After three years of economic lockdown, the world’s last stalwart of COVID restrictions was returning to business as usual. However, the post-pandemic boom has been weaker than expected and is fading. New data coming out of China has not looked good—its economic challenges are wide-ranging and no single data point can capture them. They go well beyond cyclical post-pandemic adjustments. Externally, China is suffering from declining foreign trade. At home, its property sector remains imperiled, the Yuan is suffering from bouts of deflation, and it increasingly cannot generate enough jobs for its graduates. Here are five charts that illustrate China’s multidimensional moment of macroeconomic weakness.

China’s economic woes go well beyond slow growth or a need for stimulus. The most prominent headwind facing the Chinese domestic economy remains its property sector, which began showing cracks in August 2021. Despite efforts from Beijing, issues have persisted and are once again intensifying. After five months of stable growth, new home prices declined 0.1 percent in June from the previous month. Despite falling prices, year-over-year growth in sales by floor space also fell a precipitous 14 percent in June. Falling prices and sales continue to eat away at developers’ finances. Total funds raised by developers sank nearly 22 percent in June from last year. The reverberations of property sector weakness on the broader economy cannot be overstated. Real estate and related industries contribute an estimated 30 percent of China’s GDP—about twice its share in the United States.

After just three months of expansion following the removal of zero-COVID, Chinese manufacturing fell back into contraction. In July, China’s official PMI returned a reading below 50, denoting a decline in activity for the fourth month in a row. China’s Caixin Manufacturing PMI— which focuses on smaller private firms and export-related businesses—also fell into contraction in July. Weaker Caixin PMI numbers are the result of a decline in both supply and demand with its indexes for both new orders and output also falling into contractionary territory. Chinese manufacturing weakness can also be seen in industrial production growth data which decelerated to 3.7 percent year-on-year in July, below the consensus forecast of 4.3 percent. The root of much of this manufacturing malaise sits within a slowing global economy decreasing demand for Chinese exports.

Even if the property crisis can be contained, the Chinese economy is struggling to match younger workers with jobs. In June, youth unemployment reached a new record of 21.3 percent. Little reprieve is in sight. Beijing has warned unemployment may worsen as new graduates begin their job hunt. A range of cyclical and structural factors are driving this unemployment surge. Zero-COVID was particularly damaging to service industries like restaurants and retail,  sectors that hire many young people. Crackdowns on the education, technology, and property sectors have also harmed job prospects. More broadly, in 2022 Chinese GDP growth fell below target to a dismal 3 percent reducing hiring across the economy. Finally, China has more college graduates now than ever before, with many reluctant to take factory jobs, which is causing mismatches in its labor market. All these mounting pressures have led the China’s National Bureau of Statistics to make the suprising announcement it will stop publishing data on youth unemployment after June.

In July, China returned to outright deflation with producer and consumer prices simultaneously falling for the first time since November 2020. While in sharp contrast to the rest of the world, which is struggling to control rising prices, China’s idiosyncratic price pressures are indicative of larger issues within its economy. The prolonged property slump has dented confidence and reduced consumer spending. This coupled with declining global energy commodity prices, a price war among car manufacturers, falling pork prices, and price cuts by consumer goods companies to reduce the excess stock accumulated over the pandemic have all contributed to deflationary pressures. 

As China experiences a reversal in many key domestic indicators following the end of its post-COVID boom, it has received little support for its external economic environment. A slowing global economy and deteriorating geopolitical relations have made the rest of the world far more reluctant to engage with the Chinese economy. 

Chinese exports, a traditional engine of the Chinese economy, plunged 14.5 percent year on year, deepening the 12.4 percent drop its economy experienced in June. Imports also fell just over 12 percent after a 6.8 percent decline in June. While the steep drop is partially a result of base effects from a surge in exports during the summer of 2022 after Shanghai lifted its prolonged zero-COVID lockdown, it is also indicative of falling external demand. Such weakness will likely continue into the fall as the manufacturing PMIs for many of China’s key trading partners such as the US, the EU, and Japan signal contractions. Trade policies designed to de-risk supply chains championed by the west such as “Friendshoring” or “China plus one” add new structural challenges to China’s reliance on export-oriented manufacturing. Declines in imports also point to sluggish domestic demand.

Revisiting China’s Macro Story

While an extended downturn in any one of these indicators would be a cause for concern for economic policy makers in Zhongnanhai, taken together they point to serious, structural issues within China’s economy that go well beyond the cyclical problem caused by COVID. As we discuss in the most recent version of China Pathfinder, a research project we publish in partnership with Rhodium Group tracking the trajectory of the Chinese economy, these signs of weakness and comments from officials acknowledging these problems, may imply a shift in China’s macroeconomic growth model with a return to market reforms. Emblematic of a possible shift, Pathfinder notes that in “June 2023, Qiushi, a leading Communist Party journal, published President Xi Jinping’s March 2022 speech to Central Party School cadres, in which he touched upon the need for economic restructuring. He warned against relying on old growth drivers like excessive borrowing for construction, reckless investment, and scaling up projects.” While actions by Beijing have yet to match this change in rhetoric, slowing GDP growth may yet force China to return to a market-oriented reform path.

Niels Graham is an associate director for the Atlantic Council GeoEconomics Center where he supports the center’s work on China’s economics and trade.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

Further reading

Image: Beijing, China - December 9, 2015: Night view of the Xinhua Gate-- main entrance of the Chinese Central People's Government. Security guard in the front of the gate.