Wall Street was abuzz with activity on Monday as analysts grappled with the latest figures on Chinese economic growth. According to official data, the world’s second-largest economy expanded by 6.3% in the second quarter, falling short of the expected 7.1% growth.
Major investment bank JPMorgan wasted no time in revising its growth forecast for China. The bank’s economists now project a growth rate of 5%, down from their previous estimate of 5.5%. They highlighted concerns over a potential downturn in the housing market, noting negative GDP deflator figures and persistently high rates of youth unemployment.
The weakening housing market appears to be a major challenge for policymakers as they strive for a delicate balance between long-term economic transformation and short-term growth stability. JPMorgan’s analysts emphasized the increasing intensity of weaknesses on both the demand and supply sides of the housing market, with weak income and house price expectations leading to reduced potential for private developers to invest in new projects.
Citigroup echoed these concerns and revised its growth forecast for China downwards to 5% for the full year. However, the bank remains optimistic that policy support will become more realistic in the coming months.
In their assessment, Citigroup analysts highlighted the potential challenges in maintaining the 5% growth target without adequate policy support as the initial reopening momentum begins to fade. They also expressed worry about the impact of external factors on the Chinese economy, particularly in relation to property issues and weak global goods demand. Furthermore, they noted a deep-rooted lack of household confidence exacerbated by retail weakness and quasi-deflation, which further compounds the economic challenges faced by China.
Overall, as Wall Street grapples with these economic projections for China, it is evident that market expectations are being recalibrated amidst growing concerns about the country’s economic trajectory.
China’s GDP Growth Forecast Revised Downward
Recent economic data has led several financial institutions to lower their growth projections for China’s GDP. Morgan Stanley, for instance, settled on a 5% growth rate, down from the previous estimate of 5.7%. Sluggish property and infrastructure investment, coupled with slow policy reactions, have raised concerns among investors regarding a potential regime shift in government goals. This shift could prioritize stability over rapid growth and result in a lack of significant stimulus measures aimed at boosting the economy.
Morgan Stanley, however, disagrees with this view. The firm believes that Beijing still aims to achieve a moderately prosperous society by 2035, with a target per capita income of US$20,000 compared to the current US$12,800. To meet this goal, sustaining a decent level of GDP growth over the next decade is essential. Reviving animal spirits in the private sector is seen as crucial for improving productivity and potential GDP growth, given the challenges posed by demographics, debt, and de-risking.
Economists at ABN Amro are also reassessing their numbers in light of the recent developments. They anticipate further incremental monetary easing measures in the coming months, such as policy rate cuts and reductions in the reserve requirements ratio for banks. Additionally, targeted fiscal support, relaxation of macroprudential regulations, and efforts to stabilize the property sector will be pursued to support domestic demand. Beijing aims to restore confidence among consumers, firms, and investors, as evidenced by its recent decision to end a regulatory crackdown initiated a few years ago.
In the wake of these developments, stock markets and ETFs based on China’s economy have experienced some downward pressure. The Shanghai Composite fell by 0.9%, while the Hang Seng was closed due to a typhoon warning. The KraneShares CSI China Internet ETF dropped by 1% in premarket trading. Furthermore, copper futures slumped by 3%.
It remains to be seen how China’s policymakers will address these challenges and restore confidence in the country’s economic prospects. Nonetheless, the focus on stability and the revival of private sector growth will play crucial roles in charting a path towards sustainable economic development.
