Economic Recovery Will Not Be Easy

Freedom Financial Archive | Originally posted May 03, 2023
  • China’s industrial capacity utilization definitely did NOT expand
  • Everything remains weak for China on the manufacturing and export front
  • Why are food prices being pushed higher?

Dear Reader,

Yesterday we talked about how some are saying that the Chinese economy is recovering, however the data tells a different story. We also talked about how the data suggests Chinese households are still under considerable financial pressure.

Which is to say that economic recovery for China is not going to be as easy as some believe. Today, we’re going to dive deeper with different data points.

“The industrial capacity utilization rate in China fell to 74.3 percent in the first quarter of 2023 from 75.8 percent in the same period a year earlier. This was the lowest level since the March quarter of 2020” via Trading Economics.

So China’s industrial capacity utilization *fell* ~2% y/y, but the manufacturing component of GDP grew 2.8% y/y (and construction grew 6.7% y/y)?”

The below chart (from the Chinese Government) directly contradicts the view that industrial capacity expanded, and when you compare it to y/y – it DEFINITELY didn’t expand.

Everything Remains Weak For China on the Manufacturing and Export Front

Another little caveat is the question around export capacity. We have been discussing how their exports have struggled based on ship movements, imports, and new orders.

PMI data (both official and Caixin) support our beliefs that everything has been weak on the manufacturing and export front.

The data for “growth in export values by large scale companies” supports our view, yet the headline export growth number EXPLODED.

Does this mean that small companies increased their exports exponentially? If they did, they didn’t have their AIS transponders on when they sailed away from the Chinese coast.

There also remains a broad concern around their debt as bond spreads remain elevated, and the current Wanda struggle will NOT help the situation.

If the recovery was screaming, why aren’t spreads tightening?

Another layer of concern is the expansion of unemployment in the country.

If everything is recovering, why is unemployment pushing back to peak COVID levels in a critical part of their employment pool?

We aren’t saying that China contracted, but we find it hard for them to hit estimates – let alone beat them.

The below is just another grouping to show it isn’t just China that has seen pressure mounting on the economic backdrop.

China’s Broad Slowdown

There is a broad slowdown around the region – especially on imports, which are a key bellwether for export and internal expansion.

Nick Marro, the Economist Intelligence Unit’s Lead for Global Trade, tweeted this out recently:

“Big upside surprise w/ China’s Q1 GDP today. Lots of attention to exports, production, retail… but avg imports only at 0.2% yoy (Rmb terms).

Been saying this for a while, but China’s re-opening looks self-contained; it isn’t (yet?) providing a boost for its (goods) trading partners.”

A big part of the story was the turnaround in spending as more money was pulled out of savings and used for consumption.

According to Patrick Zweifel, Chief Economist at Pictet Asset Management:

“The strong recovery in Chinese consumption in Q1 (>30% q/q ann.) is partly due to an increase in household disposable income (>14%) and a reduction in the savings rate of some 3.5% of income.”

In the two charts below, you’ll see on the left that China’s disposable income and consumption is increasing.

And on the right, you’ll see that China’s household savings are decreasing, although it still remains above average.

Even with the expansion of spending, excess savings remains well above average. We expect it to remain elevated as real estate losses weigh on the health of the consumer.

Over 68% of Chinese consumers have some sort of exposure to the real estate market, and when you layer the losses with excess savings – consumers are still underwater by 20%.

Patrick Zweifel went on to say:

“Interestingly, the savings rate is still above trend, implying that households have still not drawn on their excess savings accumulated during the pandemic…

And have continued to increase their bank deposits… apparently still preferred to financial markets.”

Food Prices Are Being Pressured Higher

On a separate note, food prices are being pressured higher and have deviated from the UN data that is on a lag.

We believe that the tightness in the food market is going to keep prices elevated and put more pressure on global markets.

It will keep inflation elevated and stress governments that are already struggling to maintain subsidies.

A broader pivot will be the shift in demographics.

This is going to be an important point as the difference expands over the next decade as the shifts draw more deals and volume into India.

India has always been “more friendly” to the West and an enemy to China.

India and China have always been at odds for thousands of years, which isn’t something that will pivot anytime soon.

Thanks for reading,

Freedom Financial News