The enigma of the Chinese recovery

The reopening that followed Covid-19 lockdowns led to some spectacular economic rebounds. It was a pattern repeated around the world – with the notable exception of China. So, what is happening there?

Admittedly, the economy recovered somewhat after the zero-Covid policy was abandoned in late 2022. The official composite PMI output index moved from a low of 42.6 at the end of December to a very high level of 57 at the end of March. In addition, GDP in the first quarter of 2023 rose by 2.2% quarter-on-quarter. This was a strong performance in comparison with the average quarterly increase of 1.2% seen over the last three years while Covid dominated, as well as the 1.7% growth seen over the five years prior to the pandemic.

But this positive news hides a less glittering reality, even before we turn to geostrategic considerations. Despite the recovery that is currently underway, the expected rise in GDP this year – based on the Bloomberg consensus – is just 5.7%, which barely matches the long-term trend prior to 2020. In addition, this bounce is very unevenly distributed between manufacturing and services. The official services PMI reached 55.1 in April versus 49.2 for the manufacturing PMI. More importantly, both are trending downwards: in March, they were at 56.9 and 51.9, respectively. The peak of activity seems to be behind us, at least for the time being, whereas the trough dates only from December.

Other data confirm the precarity of this recovery. Real estate prices are one example. A key driver of Chinese wealth, real estate prices suffered throughout 2022, resulting in some alarming insolvencies for a number of leading developers and – a rare phenomenon in China – social unrest due to unhappy owners. The start of the year was favorable, but the recovery is softening. The index for new residential buildings in China’s 70 largest cities rose by only 0.32% in April, versus 0.44% in the previous month. And caution is required regarding the financial health of real estate groups, as is illustrated by the third postponement of the Hong Kong listing of Zhuhai Wanda Commercial Management Group, a real estate subsidiary of the Wanda Group conglomerate.

The Politburo of the Chinese Communist Party was swift to react to this fragility in its meeting at the end of April. It noted that the recovery is clear but still inadequate and that further efforts are required to bolster consumer spending, reduce unemployment among the urban young – currently running at close to 20% – and strengthen the real estate market.

Despite this, the Politburo did not announce any new direct stimulus measures. China’s central bank is taking the same wait-and-see approach, so we are still waiting for easing to materialize. And yet, the time seems ripe: underlying inflation is still depressed, at 0.70%. In the absence of any real economic stimulus, the yuan is depreciating, despite central bank efforts to stem the fall of the currency via its official exchange rate fixing.

Equity markets reflect the ambiguity of the economic situation: despite strong expected growth in 2023, which should contribute around one-third of global growth according to the IMF, performance for the main Chinese indices is running at around zero since the start of the year. Meanwhile, in the West, all indices are in positive territory, despite clearly weaker expected growth.

This basic ambiguity provides the key to the enigma. China is thriving on the middle way – between recovery and relapse, a rich and a poor country, a global and regional power, Moscow and Washington – which, according to Buddhist teaching, leads to enlightenment.