China towards a stagnation similar to Japan? Macquarie says the worst is behind

  • China’s recent economic slowdown is largely due to the “premature” withdrawal of policy support, Macquarie’s chief China economist Larry Hu said in a report on Friday.
  • He expects policymakers to remain dovish, paving the way for a broader recovery.
  • This means that while China seems on the verge of Japanese-style stagnation, the situation is temporary, according to the report.

A food delivery man sits outside a restaurant in a mall in Beijing on May 30, 2023.

Jade Gao | AFP | Getty Images

BEIJING — China’s economic recovery from the pandemic is expected to broaden, meaning the country is not yet heading for Japanese-style stagnation, according to Larry Hu, Macquarie’s chief China economist.

Recent economic data from China has largely disappointed investors who had hoped for a sharp rebound in the world’s second-largest economy after Covid controls ended in December. Youth unemployment hit a record high of over 20% in April.

In a report on Friday, Hu attributed the recent economic downturn to a “premature” withdrawal of policy support after better-than-expected first-quarter data.

If the worst is behind us, the recovery is far from self-sustaining.

Larry Hu

China Chief Economist, Macquarie

Going forward, he expects policymakers to remain dovish given the lack of inflation and high youth unemployment – ​​with more urgency to ease as year-on-year comparisons the other soften in the third trimester.

“As the recovery broadens over time, the economy will enter another upward spiral with stronger demand and improved confidence,” Hu said.

At a meeting on Friday, China’s top executive body, the State Council, called for improving the business environment and removing local barriers to market access, according to officials. state media. The country would also expand incentives for the purchase of new energy vehicles to boost consumption, state media reported.

The meeting, led by Premier Li Qiang, noted that the foundations for China’s economic recovery are not yet solid.

“While the worst is behind us, the recovery is far from self-sustaining,” Macquarie’s Hu said. “Businesses are reluctant to hire due to weak consumer demand, and consumers are reluctant to spend due to weak labor market conditions.”

“Such a self-fulfilling downward spiral is a bit like Japan’s ‘lost decades’,” he said.

Japan’s economy grew rapidly in the 1970s and 1980s, only to stagnate when the bubble burst in the 1990s and stock and real estate prices fell. Japan was the world’s second-largest economy for decades, until China overtook it in 2010.

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“The lack of a self-sustaining recovery in China today is mostly a cyclical, not a structural phenomenon,” Hu said. “History suggests that concern over ‘Japanification’ will subside once the recovery is more entrenched.”

He pointed out that previous worries about economic recoveries in 2012, 2016 and 2019 had all led to market corrections in the second quarter of those years – before the MSCI China index rallied.

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But with only four months in the books after China’s major Lunar New Year holiday, longer-term trends remain difficult to predict.

A good example is China’s massive real estate sector, where a nascent recovery appears to have stalled.

“Extrapolating first-quarter sales data, one would expect new home sales to increase by 10% or more this year,” Hu said. “Extrapolating the sales data to 2Q, one would expect them to fall by 10% or more.”

“The reality may be somewhere in between.”

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