Consumer blues leaves China seeing red

A rapid slowdown in spending threatens to derail growth this year as unemployment rises

China’s economy is wobbling amid Covid-19 clusters, regulatory repression and the wrecking ball of debt-ladened property group Evergrande.

A rapid slowdown in consumer spending and industrial production threatens to derail growth this year as unemployment rises.

Added to the mix is Beijing’s massive regulatory overhaul that strengthens state control over the private sector.

“This is not a sector-by-sector rectification; this is an entire economic, industry and structural rectification,” Jude Blanchette, of the Center for Strategic and International Studies, told the CNBC business network last week.

Just as significant, this toxic cocktail comes amid rising concerns about the effectiveness of the country’s Covid-19 vaccines and what analysts have called China’s “Lehman moment.”

Challenging times:

  • The retail sector struggled last month after car sales slowed. 
  • Industrial production also stagnated.
  • The economy stayed afloat because of state-backed investment in infrastructure projects. 
  • But that approach is looking unsustainable in the long term.

Delve deeper: Unemployment amongst the young continues to rise. There is also apprehension about the “hidden” jobless “problem” known as the “underemployed.” 

Missing millions: Plus, there are zero official figures for the migrant workforce, which is the backbone of e-commerce, construction, manufacturing and key service sectors.

Winds of change: “Headwinds have emerged on numerous fronts, challenging our baseline forecast that China’s economy will grow by 8.4% this year and 5.5% in 2022,” Fitch Ratings reported earlier this month.

Percentage game: Bank of America on September 21 lowered its forecast for China’s economic growth next year to 5.3% from 6.2%.

Corporate chaos: In the micro economy, the Evergrande debt saga has been bubbling away during the past year. Only US$20 billion of the company’s $305 billion loans are owed offshore, according to Refinitiv data.

Debt trap: Analysts fear that this could be China’s “Lehman moment,” a reference to the collapse in 2008 of the Lehman Brothers investment bank. The incident triggered the Wall Street financial crisis which quickly spread worldwide.

Big Picture: Other economic risks involve the Covid-19 pandemic. An outbreak in Fujian is proving difficult to control even though 78% of China’s population has been vaccinated.  

Contagion dilemma: That could have economic repercussions. “[It] should mean the population is starting to approach herd immunity – provided the vaccines are genuinely effective in preventing contagion,” Trivium China stated.

Firing blank shots? “A significant relaxation would demonstrate confidence in China’s homegrown vaccines. Similarly, the continuation of a zero-tolerance approach to [Covid-19] would be an implicit acknowledgment that the Chinese vaccines are not wholly effective in stopping the virus,” the research group said. 

China Factor comment: As we said at the start of the month, cracks have appeared in the world’s second-largest economy. Since then, the only change is that the cracks have widened.