The author of this text is the president of Rockefeller International and they argue that there is a significant gap between Wall Street analysts’ optimism about the Chinese economy and the reality on the ground. While some investment banks remain optimistic about China’s GDP growth, which is forecasted to be over 5% by 2023, the author believes this is far too hopeful. Sales in the first quarter only increased by 1.5%, instead of the expected 8% based on past trends, and corporate earnings are growing slower than official GDP figures in 20 of China’s 28 sectors. Although many analysts hope that China’s consumers will spend extravagantly once lifted from lockdowns, the author notes that there is no indication of this.
As a result of sluggish sales, profits are being squeezed at consumer-goods companies, leading to a fall in the MSCI China stock index by 15% from its January highs, and a fall in consumer discretionary stocks by 25%. Despite this, analysts are relying on the idea that consumer demand is rising due to the reopening boom. However, imports fell 8% in April, and China’s credit growth has slowed. Much of the stimulus over the past decade has been through China’s local governments, which have used their own “financial tools” to rent and buy property to prop up the market. These tools are rapidly running out of cash to pay off their debts, and investment in the real estate market and industry is also curbed.
Additionally, the author notes that China’s economic model has relied heavily on government stimulus and rising debt, largely pumped into the property market. This has led to debt accumulation that is now unsustainable and running out of steam, with many local governments running out of cash to pay off their debts. The industrial sector is decelerating faster than the consumer-related businesses that are central to the reopening story.
China’s population growth has also negatively impacted GDP growth potential, as there are fewer workers entering the labor force with high debt reducing output per worker. Despite all of these warning signs, Wall Street analysts continue to be optimistic, leading to significant losses for investors over the past four months. The author suggests that it is time to expose this farce before things get any worse.