China's Reopening Is Slower Than Anticipated

After China lifted its Covid-19 restrictions at the end of last year, economists and analysts on Wall Street predicted a swift rebound in economic growth for the world’s second largest economy.

The Washington-based International Monetary Fund said in February that China’s economy was set to rebound this year as mobility and activity pick up after the lifting of pandemic restrictions, providing a boost to the global economy. The economy was projected to expand 5.2 percent this year, according to their latest projections, versus 3 percent last year.

Six months into 2023, though, China’s economy is struggling. Its exports and imports have declined, its debt-ridden property market is beleaguered and forecast to recover in an “L shape.” The Yuan has fallen to a six-month low against the US dollar and local governments are struggling to repay their debts, raising questions about whether Beijing will offer enough support.

The Chinese economy is expected to slow amid “falling demographic demand, a shift in policy focus to support strategically important sectors, and weaker housing affordability,” Goldman Sachs analysts wrote in a note.

In response to disappointing economic data, on June 14th the People’s Bank of China cut the seven-day reverse repurchase rate in “order to keep the liquidity in the banking system adequate at a reasonable level.” The PBOC cut its seven-day reverse repurchase rate by 10 basis points from 2% to 1.9%, according to a central bank release, injecting 2 billion Chinese yuan ($279.97 million) through its seven-day repos.

Exports Fall

China exports fell in May for the first time since February and were much lower than forecast. Exports dropped 7.5% year-on-year to $283.5 billion, customs data showed on June 6, far worse than the 0.4% decline predicted by a Reuters poll. In April, China’s exports beat expectations slightly with 8.5% year-on-year growth. 

The decline was so sharp that export volumes came in below their levels at the start of the year, after accounting for seasonality and changes in export prices, Julian Evans-Pritchard, head of China Economics at Capital Economics, said in a note.

“This points to subdued global demand for Chinese goods,” he told CNBC on June 6.

Customs data released showed the dollar value of China exports to the U.S. slumped 15.1% from the January to May period compared to a year ago, while exports to the European Union declined 4.9% in the same period. China exports to ASEAN rose 8.1% in U.S. dollar terms from January to May, compared to a year ago.

Property Woes

China has deeper economic woes. Its struggling real estate industry is expected to see an L-shaped recovery in the coming years, placing a drag on the world’s second-largest economy, according to a research note by Goldman Sachs Group Inc.

Policy makers appear determined not to use the property sector as a short-term stimulus tool and instead want to reduce the economy’s reliance on the industry, the US investment bank said in a research note. The country is expected to see a multi-year slowdown due to “falling demographic demand, a shift in policy focus to support strategically important sectors, and weaker housing affordability,” Goldman analysts led by Wang Lisheng said.

China property shares dropped after the Goldman report.

Hong Kong-listed Country Garden Holdings Company Ltd (HK:2007), Poly Property Group Co Ltd (HK:0119) and Guangzhou R&F Properties Co Ltd (HK:2777) lost between 2% and 5% by the midday break, while Sunac China Holdings Ltd (HK:1918) was the worst performer among its peers, down over 12% to near 12-year lows.

Yuan Falters

China's Yuan has also dropped to six-month lows against the Dollar and analysts say it could weaken further as investors fret over a bumpy pandemic recovery in the world's second-largest economy.

The Yuan has depreciated more than 5% against the surging Dollar in the last year, since the highs hit in January, when global markets embraced China's reopening. It is one of the worst performing Asian currencies this year. It is currently trading at 7.16 against the dollar.

"(The Yuan) is set to remain pressured by structurally negative carry that handicaps supportive flows including foreign portfolio investment bond inflows and corporate dollar selling," said J.P. Morgan analysts in a note. "The People's Bank of China's tolerance of currency weakness ... also opens up room for further Yuan weakness."

JP Morgan recently downgraded its year-end Yuan forecast, from 6.85 per Dollar to 7.25 per Dollar.

Dimon’s Commitment

Western trading partners have criticized China from its human-rights abuses to concerns about the government's increasing role in the country's commerce, in widening criticisms of the political landscape. China has been cracking down on overseas firms, one sign that its leadership values national security over economic growth, The Wall Street Journal reported.

Despite the negative sentiment, JP Morgan Chase CEO Jamie Dimon said his bank is committed to China, despite the country's growing tensions with the US. He acknowledged in a Bloomberg TV interview that relations between the U.S. and China have become more complex recently

“When we do business in a country, and we do business in 100 countries around the world, we are there for the citizens of the country,” Dimon said in the interview while at the JPMorgan Global China Summit in Shanghai.

“We’re there hopefully through good times and bad times,” he said. “We tend not to leave, other than if there’s war or civil war. And so we're not predicting any of that here."