The Chinese consumer is at the center of the recently announced public support measures which, according to Allianz, should address but not fully resolve the crisis of trust. Employment prospects are at their lowest levels since early 2023 and one in five young people are unemployed, as key sectors such as IT, real estate and finance have reduced hiring prospects.
China, the real estate market crisis and the interventions of the Chinese state
Il Real Estate Market has been hit by real interest rates close to 5%, which have dampened prospects for new buyers but also kept the debt burden high for existing ones. As a result, the recent measures announced by the authorities focus on consumption, housing and financing, although they are incremental and far from the fiscal bazookas seen in recent years. They should prevent a further deterioration in economic activity, but will not result in a solid and lasting recovery in growth.
Authorities moved relatively quickly to address the market crash real estate through further regulatory easing measures to enable second home buyers to become first-tier home buyers and reduce the housing glut. While construction activity will be supported by the acceleration of infrastructure spending, the outlook for the residential sector remains weak.
The monetary stance is still far from restrictive, with a net negative effect of -0,5 percentage points on growth.
Economic problems are putting pressure on China's capital markets. Due to disappointing economic data, low inflation and persistent vulnerabilities for real estate developers, Chinese sovereign bonds have seen some of the lowest returns in the last 20 years, with the 10-year currently trading below 2,7%. While analysts do not expect returns to fall below 2,5% this year, downside risks remain.
This relatively low yield environment is contributing to the downward pressure on the Chinese yuan, as major economies such as the US they quickly raised rates of interest in the last 18 months.
Since the beginning of 2023, consumer and producer prices have been experiencing a deflationary trend. China's producer price index fell -4,4% y/y in July, while inflation turned negative for the first time since the start of 2021. Allianz expects ainflation in China equal to an average of +0,4% in 2023 and +1,7% in 2024.
China: the manufacturing sector and autumn prospects
And with the process of reducing inventory in the manufacturing sector behind it, a moderate recovery in production and new orders are expected in the autumn. Furthermore, the outlook for external demand is less deteriorated as real wage growth is turning positive in advanced economies. However, industrial goods will continue to suffer from low overseas investment prospects.
Overall, a GDP growth by +5,3% in 2023 and +4,7% in 2024. In 2023, most of the downward revision comes from lower growth in private consumption, investment and imports. As if, after the pandemic, the main economies have reduced their dependence on the Chinese consumer.
