Play along as the data out of China continues to toll its drumbeat of woe

(Originally published July 18 in “What in the World“) In one of the most widely expected disappointments in recent memory, China reported that its economy grew more slowly than forecast in the second quarter.

GDP expanded 6.3% from its Covid-constrained level a year ago, according to government data. Economists had expected growth of 7.3%.

That may sound fantastic if you’re used to hearing that U.S. economic growth is just 2%. But the U.S. is a wealthy, developed economy that is expected to grow at a more measured rate than one still playing catch-up. While U.S. GDP-per-capita is $70,250, China’s GDP-per-capita has only risen to just above $12,500. And if China can’t revive growth, it may be stuck there.

China’s growth is also off a low base: last year’s economy was depressed by China’s Covid lockdowns. Economists had expected spending and investment to roar back once restrictions were lifted. They haven’t.

What’s worse is that, as the American Enterprise Institute’s Derek Scissors points out, China’s nominal growth was lower than real GDP growth, at 5.4%. That’s because prices are falling in China, meaning China is suffering not from inflation, but deflation.

New home prices in China were flat in June compared to the same month of 2022, according to a Reuters analysis of data from China’s National Bureau of Statistics.

Quarterly data are more revealing of the overall trend. The average urban home price fell 1.6% year-on-year in the second quarter, according to my own analysis of the NBS’ monthly figures. But markets vary widely across China and what city, with prices dropping 14% in Wenzhou and Dalian, but climbing by 14% in Shanghai, 15% in Hangzhou and soaring 24% in Chengdu.

Nevertheless, falling prices for new homes will put further pressure on China’s heavily indebted property developers as demand drops.

China is also a collateral victim of Russia’s latest decision to drop out of a Ukraine grain export deal. While the Black Sea Grain Initiative, which allowed for wheat exports from Ukraine past a Russian blockade, was largely seen as benefiting hungrier grain importers in the Middle East and Africa, China had turned out to be a key beneficiary. While China is one of the world’s largest wheat producers, it doesn’t grow enough to feed its many hungry mouths.

China is thus also one of the world’s biggest wheat importers and had emerged as the top destination—along with Spain and Turkey—for Ukrainian wheat under the agreement. Matters aren’t being helped by climate change, which has hit China’s summer and autumn wheat harvests.

For those of you interesting in playing China Economic Bingo, here’s a breakdown of the biggest risks to China’s faltering economy. This week sees ticks to three on the list, Nos. 5, 17 and 23 below. The arrival in Beijing this week of White House special envoy for climate change, John Kerry, sets the stage for a possible fourth with No. 11.

Biggest risks to China’s economy:

1. U.S. sanctions hit exports
2. U.S. restrictions on investment and technology transfers slow development of higher productivity services
3. Consumer spending fails to replace reliance on investment
4. Weakening global demand, global recession hits China’s goods exports and inward investment
5. Housing market correction—affects savers, developers, local governments
6. China succumbs to a deflationary spiral
7. Financial Crisis: Rising debts pose a risk to the country’s financial stability. Excessive debt could lead to potential defaults, liquidity issues, financial contagion, and a financial/economic crisis.
8. Limitations on key technology imports
9. Debt: High debt risks squeezing out real investment and growth. China’s corporate, household, and government debt levels have been steadily rising.
10. President Xi Jinping dies, quits suddenly or is deposed
11. China fails to participate meaningfully in solving global climate change
12. Policies fail to revive declining productivity
13. China restricts exports of key metals and minerals necessary for sustainable technologies that mitigate climate change
14. Ageing population, rising social welfare costs and higher labor costs
15. Foreign companies continue shifting supply chains out of China, disinvesting
16. Failure to fix the healthcare system
17. Climate change hastens deteriorating environment and related risks to property, capital, food supplies, health and lives
18. Economic policy moving from pragmatism-led to ideologically driven policies that favors State-owned enterprises over entrepreneurial startups and free markets
19. Failure to successfully grow services sector to replace reliance on manufacturing
20. U.S. and China militaries clash in Taiwan Strait or South China Sea
21. Lower-carbon industries fail to grow and replace high-intensity ones
22. High youth unemployment gives way to unrest
23. China suffers diminished or interrupted access to key commodity imports