China’s economy could be giving us mixed signals with the post-pandemic recovery possibly tapering off as stimulus measures trickle away. On the one hand, exports are falling and inflation is in negative territory. On the other hand, commodity imports are still strong and third quarter (Q3) gross domestic product (GDP) has picked up as well.
The country’s economic recovery is likely to have a significant impact on European markets, via a number of different avenues. These include imports and exports, energy, investments and more.
The last few years have taken their toll on China, with the country facing one of the worst outbreaks of the coronavirus, which led to extended lockdowns and a slew of zero-Covid measures. During this time, China’s real estate and property sector was also severely undermined by Evergrande’s near collapse.
China’s October exports fell 6.4% year-on-year, marking the sixth consecutive month of declines. This could spell bad news for the European Union, as it imports about 20% of its goods from China, which is also its third largest export partner, accounting for about 9% of EU exports. Domestic production in China is also lagging somewhat, making fewer goods available overall.
The year-on-year inflation rate for October came in at -0.2%, below September’s 0% as well as consensus estimates of -0.1%. This shows that domestic demand is still struggling considerably, especially as consumer sentiment dampens over the housing crisis.
Deflation, such as China is seeing at the moment, can lead to the value of debt becoming more expensive. As a result, governments, as well as companies and individuals may find it more difficult to make repayments.A woman walks by a map showing Evergrande development projects in China, as she heads to an Evergrande city plaza in Beijing on Sept. 18, 2023.Andy Wong/AP
With key real estate companies in China already struggling to make dollar bond payments on time, this could quickly become a slippery slope. If so, the shockwaves would be heavily felt in Europe as well.
Even now, European stock markets already feel the pain every time significant new Chinese economic data hits the market, such as GDP, retail sales, exports and inflation prints. This is due to a number of European companies being reliant on China at some point or the other in their supply chain.
China’s stuttering recovery has also caused a dip in its investments in Europe. As of April 2022, China’s foreign direct investment (FDI) in Europe reached its lowest level in a decade, coming to about €7.9 billion.However, it looks like there might be a silver lining in the midst of gloomy Chinese data after all. GDP in the third quarter of 2023 advanced 4.9% year-on-year, more than analyst expectations of 4.4%.
Although this is at odds with inflation and demand data, it could point towards manufacturers starting to find their feet again. This follows a long period of production cuts due to zero-Covid measures, higher energy prices and increased raw material costs.
A stronger case could also be made for new and more consistent stimulus measures, following China’s latest underwhelming inflation report. This might further bolster the flagging property sector, while also better supporting the manufacturing and renewable energy sectors. Increased tax breaks may be on the horizon too. Travellers walk by a Communist Party's logo decorated at the departure hall of Beijing Daxing International Airport, in Beijing on Oct. 24, 2023.Andy Wong/AP
Several banks, such as JPMorgan Chase and Citigroup expect China’s GDP growth for 2023 to be above Beijing’s official target of 5%. JPMorgan has pinned hopes on 5.2% growth, whereas Citigroup estimates 5.3% growth. This could indicate an uptick in global sentiment regarding China’s recovery.
