By Reshma Kapadia
China's economy appears to have turned a corner in the first quarter, but a new batch of indicators from the independent research firm China Beige Book shows that the momentum needed for a sustained rebound has yet to develop.
It's a problem because there is little sign the government is going to change the way it is trying to stimulate the economy. And that approach is creating friction with China's trading partners.
The iShares MSCI China exchange-traded fund is down 1.3% so far this year while the domestically-oriented iShares MSCI China A ETF is off by 0.3%. Both are lagging far behind other markets, partly because there hasn't been a more aggressive effort to supercharge China's economy.
There is no doubt that the world's second-largest economy is improving, given that a variety of green shoots emerged in the first quarter. But China Beige Book's latest batch of indicators strengthens the case that while the worst may be over, the recovery hasn't achieved the kind of momentum that could power stocks higher.
The good news: The battered property market logged some improvement . Commercial property sales and prices grew in the first quarter, while the slide in housing prices paused. Home builders and commercial real-estate companies said prices bounced off the lows seen in the fourth quarter. More people bought homes, an apparent response to a steep drop in mortgage rates. The number of new projects and growth in real-estate-related capital spending also perked up versus the fourth quarter.
But the pace of investment was still tepid, underscoring skepticism about the recovery. "Developers remain unconvinced that this -- or perhaps any -- property recovery is truly sustainable," China Beige Book analysts said in a report.
Retail and services companies were a bright spot. Companies reported better revenue, profits, capital spending, and pricing for their products compared with both the previous quarter and the prior-year period, according to China Beige Book. But the analysts described the improvement as "more of a return to mediocre from genuinely poor." The view from manufacturing -- a key pillar for the recovery given that the government has pumped money into the sector -- wasn't particularly encouraging. Manufacturing revenue, profit, capex, hiring, domestic orders, export orders, and sales prices all saw slower growth. The share of firms reporting growth fell below that in retail and services, according to China Beige Book. Borrowing and bond sales by manufacturers also plunged.
Chinese leader Xi Jinping has been a big proponent of investing in manufacturing with a focus on "new productivity forces" as the biggest form of stimulus for the economy. Economists expect China to lean on exports to revive its economy.
Investment in areas favored by policymakers -- a category that includes companies linked to the energy transition, including electric vehicles; semiconductors; and other industrials -- was up 19% from a year ago in 2023. That investment now accounts for 12% of gross domestic product, about the same as what the government invests in the property sector, according to TS Lombard.
But even manufacturing companies are under strain. The government is pushing them to maintain or speed up their growth in output despite shortages of labor and a lack of domestic demand for what they produce, according to Derek Scissors, chief economist at China Beige Book.
"The natural next step is to seek greener pastures overseas, preferably rich countries," Scissors said. "To defend profitability and revive exports, Chinese manufacturers will try to undercut higher-margin foreign producers, also known as trying to export deflation."
European and U.S. policymakers are already trying to get ahead of an onslaught of cheap Chinese electric vehicles, machinery, and electronics that is threatening domestic players. Europe has launched subsidy investigations into China's support for its electric-vehicle manufacturers, and most analysts expect those probes to lead to tariffs on Chinese cars. Treasury Secretary Janet Yellen has raised the issue of overinvestment in production capacity repeatedly in her meetings in recent days with Chinese counterparts.
So far, there is little sign that Chinese officials are rethinking their recovery playbook. China Beige Book, for example, sees no indication of an uptick in transport construction or hiring -- data that would indicate a burst in government spending. And prices of commodities, which would get a boost if the government was plowing cash into infrastructure, also show no signs of a pop.
"This isn't enough [stimulus] to push markets higher, and mildly good news may actually be 'bad' for equities as it lowers the chance of increased stimulus," Rory Green, head of China and Asia research at TS Lombard, said via email.
More trouble could be ahead. If China continues to pump money into manufacturing with an eye to exports, other countries could push back, thwarting that growth. "China will escape tariffs in this election year and there may even be some front loading of U.S. import demand ahead of future trade restrictions," Green cautioned. "But beyond 2024, tariffs inevitably ratchet higher."
Write to Reshma Kapadia at reshma.kapadia@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
April 11, 2024 18:00 ET (22:00 GMT)
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