China’s Economic Tango
In a recent report, Macquarie’s Chief China Economist Larry Hu suggests that China’s economic recovery from the pandemic is expanding, alleviating concerns of a Japan-style stagnation. Although China’s economic data has disappointed investors anticipating a swift rebound, Hu attributes the recent slowdown to a premature withdrawal of policy support following better-than-expected first-quarter results. Looking ahead, Hu anticipates policymakers to maintain accommodative measures due to low inflation and high youth unemployment, with a growing urgency to ease as year-on-year comparisons soften in the third quarter. As the recovery continues to broaden, Hu predicts the economy will enter an upward spiral characterized by stronger demand and increased confidence. The country also plans to extend purchase incentives for new energy vehicles to boost consumption. However, the State Council acknowledged that the foundation of China’s economic recovery must still be solid.
Hu highlights the similarities between the current situation in China and Japan’s “lost decades.” He points out that while the worst may be behind, the recovery is still far from self-sustaining. Soft consumer demand hampers companies’ willingness to hire, while weak labor market conditions discourage consumer spending. However, Hu considers the absence of a self-sustained recovery in China as a cyclical rather than structural phenomenon. Historical patterns indicate that concerns about economic recoveries in the past eventually subsided, leading to market corrections and subsequent upward trends. Despite expectations of a potential 10% or more increase in new home sales based on first-quarter data, the second-quarter sales data suggests a potential decline of similar magnitude. However, Hu cautions that the reality may lie between these extrapolated figures.
What do you think about the situation with China’s economy? Where will it head going forward?
Want to learn how to invest? Download the Invstr app, where you can play Fantasy Finance and manage a virtual investment portfolio or open a brokerage account and invest for real. Take our interactive investing course on Invstr Academy and become a better investor today!
I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.