A new optimism regarding China’s economy has emerged. After a troubled 2023, exports edged up in December, and the pace of deflation moderated. It would be a mistake to take too much heart from this news.
Besides a few meaningless statistical wiggles, nothing in this latest information flow suggests much improvement in Chinese economics. On the contrary, the recent news confirms China’s problems and gives little hint of a way out of these troubles.
The most general and also most disturbing news is China’s continuing deflation. According to Beijing’s National Bureau of Statistics, consumer prices in December fell by 0.3 percent from the year before. That’s a slight improvement over the 0.5 percent deflation recorded in November, but it’s hard to make too much of these kinds of month-to-month wiggles.
The fact is that prices are in decline and have been declining off and on since March. Producer prices, which the Chinese authorities call “prices at the factory gate,” tell an even more distressing story. These showed a December drop of 2.7 percent from year-ago levels, the 15th consecutive monthly decline.
Deflation—especially the consistent and dramatic sort China has suffered—clearly signals insufficient demand. People can parse the figures month to month. They can discuss which prices are dragging the averages down and which are bucking the trend. The latest December figures show that food price declines led to general deflation. Such analyses may be used for businesspeople preparing, for instance, for a shift in their product mix, but the shifting mix from month to month means little otherwise. The main message is less in the mix than in the persistent deflationary trend and what it says about inadequate levels of demand.
Part of this serious and general demand problem stems from the drop in exports. December did show a slight uptick from November. All exports rose by 2.3 percent from year-ago levels. For an economy that remains heavily dependent on sales overseas, this sort of expansion is, at best, only modestly encouraging. It’s a far cry from the annual export growth of more than 10 percent recorded as recently as 2022 and even early 2023.
But the recent figures contain still more depressing news. The only reason the figures showed growth was that the year-ago base was especially depressed by the severe lockdown requirements of the zero-COVID policy in force at the time. Absent that, they would have shown a decline.
Even more telling is the fact that the meager gains were due entirely to sales in Russia, a country where Western sanctions have given few options besides China. Exports to Russia rose at a startling 46.9 percent rate from a year ago, a pace that the beleaguered Russian economy can hardly be expected to maintain. Meanwhile, exports to the United States in December fell by 6.9 percent from year-ago levels, and exports to the European Union fell by 1.9 percent. December exports to the Association of Southeast Asian Nations were 6.1 percent lower than year-ago levels. These are areas where China’s still very export-dependent economy needs sales to produce acceptable overall growth rates. Although some see hope in the prospect of declining credit costs in the West, such moves are not likely until late in 2024 at the earliest.
Nor does it look like China’s domestic demand is in any position to make up the difference left by falling exports. Here, some of the damage is shown in the import figures. The December figure showed only a paltry increase of 0.2 percent over year-ago figures. This is a slight improvement from declines of nearly 10 percent earlier in the year, but it is hardly the stuff of an economic rebound. It is especially disappointing because Beijing has pushed economic stimulus over the past 12–18 months, and the People’s Bank of China has reduced borrowing costs. Only stubborn problems are likely to persist after that kind of support.
And there is a reason why those problems are so stubborn. The property development collapse of the past two years has left in Chinese financial markets a legacy of questionable debt that has hamstrung the nation’s ability to finance new investments—both public and private—and, hence, growth. The real estate collapse has also depressed homebuilding, an area that until recently was a bulwark of the Chinese economy. At the same time, these problems, by depressing home values and so the net worth of Chinese households, have also held back consumer spending, which China needs now, especially with weak exports.
China may yet avoid an outright recession, not seen there since the Asian financial crisis of 1998. Even so, the economic prospects for 2024 are hardly uplifting, not the least because the rest of the world hardly seems poised for rapid growth.
