In June 2023, China’s unemployment rate for the 16-24 age group hit a new record of 21.3%. A month later, the release of this rate was suspended. The same year, the CSI 300 Index, down almost 14% during 2023, caped an unprecedented third straight annual loss, burying down investors’ hopes of a post-COVID recovery. The 2023 concludes with China’s GDP of 5.2%, a pace that would make many envious among the major economies. However, this rate marks the weakest performance in three decades for China outside the COVID-19 period, at a time when a real estate crisis and uncertainties are weakening the recovery. Yet, China is still the second power worldwide, ambitious, providing itself with the means to achieve its ambitions. Therefore, what are the new trends affecting China? How can we understand the evolution of the last decade? How do financial markets price those evolutions?
15 years ago, the US recession had significant effects across the globe, impacting China’s growth trajectory. China embarked on a massive economic stimulus program, surpassing by a ratio of 2 the efforts of the US at the time. This move was initially overlooked because of Obama’s fiscal package. Despite the short-term boost to growth, some concerns might have arisen regarding productivity and the accumulation of public debt.
A macroeconomic perspective since 2021: Three pivotal policies
China’s macroeconomic current situation could be dated back to 2021, a year when three crucial policy decisions reshaped its economic path. Firstly, efforts to curb the real estate sector were intensified, signaling concerns over a potential bubble and credit risks. However, tackling a gap equivalent to a quarter of the GDP turned out to be quite the challenge, affecting growth prospects and shaking investor confidence.
Secondly, China embarked on a sweeping crackdown targeting tech giants, exemplified by the high-profile antitrust probe into Alibaba. This initiative formed a crucial component of China’s overarching ambition to ascend as a technological superpower on the global stage. By reining in the dominance of tech behemoths, authorities sought to foster a more equitable playing field while bolstering domestic innovation and competition. However, the crackdown also raised concerns over its potential impact on investor sentiment and the broader tech ecosystem, highlighting the delicate balance between regulation and innovation in China’s evolving economic terrain.
Thirdly, China’s zero-COVID policy initially proved effective until the emergence of the Omicron variant in 2021 presented new challenges prompting localized shutdowns. However, this policy, without further assistance, resulted in population confinement, raising doubts about its initial success.
Those three pivotal policies underline that China grapples with the challenge of identifying a sustainable growth model amidst a declining real estate sector and the anticipated growth in manufacturing. Nonetheless, anticipating a growth in manufacturing demands increasing exports and thus finding receptive markets, particularly amid potential restrictions from the US and Europe. Poor local consumption poses additional hurdles, compounded by the decline in infrastructure spending due to local government financial constraints.
Finally, amidst mounting debt levels, China seeks avenues to escape the deflationary trap. The focus shifts towards technological innovation and breakthroughs, exemplified by the surge in solar panel installations and aspirations to lead in cutting-edge technologies. For instance, China surpassed the total solar panel installations of any other nation in 2023 alone, contributing to its extensive renewable energy capacity, which already outpaces the rest of the world by a significant margin. However, concerns linger over consumption leaks and the looming specter of ‘japonification,‘ characterized by prolonged economic stagnation, aging population, deflation, and subdued consumer sentiment. As China navigates these macroeconomic challenges, the path forward remains uncertain. The country’s ability to leverage technological advancements while addressing structural issues will be pivotal in shaping its economic trajectory. However, achieving sustainable growth amidst mounting debt burdens and shifting global dynamics requires a delicate balance of policy interventions and market reforms. In this evolving topography, China’s choices will not only impact its economic destiny but reverberate across the interconnected global economy.
Understanding China’s Geopolitical Puzzle
As emphasized earlier, China has a significant importance in the global economy. Its remarkable shift from rural roots to being an economic powerhouse has captured widespread attention, leading to discussions, analyses, and predictions about its future path. However, beyond the surface-level discussions and statistical analyses, there are layers of ideology, of geopolitical dynamics, and of trade relations, all of which exercise profound influence on China’s economic path. Therefore, to capture the intricacies of China’s economic dynamics today, it is essential to delve deeper into the factors that shape its policies and drive its growth. In other words, a comprehensive understanding of China’s modern economic situation necessitates an examination of the interconnectedness between ideology, geopolitics and trade patterns.
Ideology serves as a guiding principle for China’s governance. Lenin approached ideology as more or less a collection of beliefs, values, and representations, not necessarily true, coherent, or wrong, but certainly held by a group of individuals in a human society, which is used as a tool to gain control over that society and maintain it. With that perspective, we could understand the importance of the 19th Congress of the Chinese Communist Party in 2017. Marked by slogans advocating for bigger, better, and stronger state-owned enterprises, this congress addressed a new anthem for China’s economic direction. Subsequently, efforts to restrain the private sector appeared evident in the 2021 crackdown on tech, gaming, and private education industries. But more globally, the uncertainty surrounding the party’s stance on different sectors created a freezing effect on what Keynes would call the «animal spirit». This became evident in 2021 when the Communist Party authorities and government authorities started to talk about the unrestrained expansion of capital which led to that visible crackdown. So much so that private sector firms just didn’t know how much their autonomy stretched. It created an atmosphere of asymmetric information where an investor did not know if a given sector was to be preserved. Another example could be taken from December 2021, when China’s Communist Party authorities started speaking about a traffic light system. This system was thought of as a way of indicating what kind of private sector is good and what kind of private sector is bad. Even if this policy wasn’t implemented, it pledged about the global tension and what we can call a « freezing effect on the Keynesian animal spirit ».
Nonetheless, this freezing effect impacted also Chinese households. If the investment is somehow frozen, unemployment is rising along with anxiety among Chinese households. The consumption downgraded. If the prices go down because of the economy’s situation, then waiting for them to go down will indeed make them fall. This self-fulfilling prophecy creates a real risk of a deflationary spiral. Thus, since August 2023, China’s inflation has been negative for 5 months.
Another driver of a low level of confidence in China could be understood through the will to decrease the real estate sector already presented earlier. China’s heavy reliance on the real estate sector, constituting 25% of GDP, poses a significant economic vulnerability. Government efforts to reduce dependency on real estate investments could be understood deeply through two perspectives. On one side, we have a portfolio balance theory of diversification; do not put all your eggs in one basket. On the other side, geopolitical considerations might further drive this agenda, aiming to channel capital into strategic sectors such as semiconductors, high-tech, and green energy to mitigate external risks from potential geopolitical tensions. This ambition could be understood under a larger program of « an asymmetric decoupling », seeking to make China less dependent on the world and the world more dependent on China. This strategic maneuver could increase the cost of sanctions for commercial partners, fostering mutual deterrence in case of international sanctions.
Amidst Current Developments, is China still investible?
In the face of uncertainties, alternative data sources and geopolitical insights become invaluable tools for forecasting and strategic decision-making. If overall investor sentiment seemed positive about a recovery in 2023, the reality was quite different, and alternative data highlighted this in advance. By analyzing the density of NO2 (polluting gas emitted by the heavy industrial sector) through satellite data and by crossing that information with ‘maritime traffic’ data analysis in major Chinese cities, QuantCube Technology notified in advance of weak pollution in specific regions pledging weak activities. For instance, the following graph from QuantCube Technology focuses on Wuhan, the capital of the Hubei province, which is also a political, economic, financial, cultural, and educational center in the middle of China.
Wuhan is known for having major industries including optical-electronics, automobiles, iron, and steel manufacturing. Therefore, it is easy to see that the middle of China’s activity regain was not in the cards. With the same analysis, Guangzhou’s city, owning the largest number of industrial categories among the cities in the south China area shows a weak increase during 2023 in industries such as automobiles, electronics, and petrochemicals but an important decrease during 2024. At the same time this year, QuantCube Technology noticed that Chinese economic growth is currently driven by the North-East of China as shown in the satellite images, and the YoY change in the density of NO2 in the city of Beijing.
More generally, concerns over investability and regulatory uncertainties pose challenges for private investors, necessitating a nuanced approach, such as understanding the overall geopolitics or consulting alternative data to navigate China’s evolving economic situation.
Embracing innovation, finding new global partnerships, and navigating geopolitical tensions will be paramount in realizing China’s economic aspirations in an interconnected world.
Established in 1980, the Master 203 - Financial Markets is a Global Market Finance program tailored to prepare specialists for front office roles in investment banks, asset management firms, consultancies, and insurance companies. Taught entirely in English, the curriculum places a strong emphasis on practical skills such as specific valuation techniques, negotiation strategies, investment practices, arbitrage, hedging, and risk management across various financial products including shares, interest rate instruments, exchange rates, commodities, and derivatives markets.
