You can also listen to this podcast on iono.fm here.
SIMON BROWN: I’m chatting now with Casey Sprake, investment analyst for fixed income at Anchor. Casey, I appreciate the early morning. I have to say that was a great note that came out from you and your team last week around China. Its GDP for last year at 5.2% puts it marginally year ahead of its 5% target. The point you make, though, is that growth is slowing in cyclical and structural issues. That 5% target is going to get harder and harder to achieve. It’s not going to be the slam-dunk which the targets have been for the Chinese government perhaps over the last decade or two.
CASEY SPRAKE: Good morning Simon and thank you for having me on the show today. And yes, I think that’s exactly the point. Without a doubt we’ve seen that China’s growth slowdown is deepening. If we look back at 2023, almost every economic indicator – think exports, manufacturing, real estate consumption and credit stock markets for that matter – has really disappointed, and as we enter into 2024 is really continuing to disappoint.
And from that it’s becoming increasingly clear that China’s structural policy trends are really beginning to cloud its medium-term growth prospects. We are seeing productivity growth remaining weak, driven by low productivity in the state of enterprises and diminishing business dynamism, etc.
So it’s really becoming clear that China’s economic weakness is becoming more of a structural story rather than simply a cyclical downturn that bottomed out in 2023 – which is what I think within financial markets a lot of investors were hoping for.
SIMON BROWN: Absolutely. At the beginning of last year there was a lot of talk that this was going to be all about China, and you make that point. It’s structural. They need to rebalance that economy, which is easy for you and me to chat around, but they need to get it from sort of investment growth towards domestic consumption growth – and that’s going to be hard.
CASEY SPRAKE: It’s going to be incredibly difficult for any economy to achieve, let alone one with such a complex structure as China. It’s really quite simple, because without sustained trade surpluses there are only two real ways that a country can balance excess supply and weak demand – which is what China has at the moment.
The first way is via very disruptive and unattainable domestic production collapse, and that is what we saw in the US, for instance, during the Great Depression in the 1930s.
And then secondly the other option is to try to boost consumption. And for China in its particular setup that is going to be incredibly tricky to get right for the Chinese authorities.
SIMON BROWN: You make the point in your note that the maths seems to be that domestic consumption needs to grow up to 6% or 7% a year, which in my notes here seems a tall ask. It probably is an impossible ask, which takes us then back to the point that the China of old has really gone and we need, as a global economy, to get used to a lower-growth China.
CASEY SPRAKE: Essentially I think that’s sort of the way forward. As you mentioned from a straight arithmetic perspective it is incredibly difficult for China to maintain growth rates of, let’s say, 4% to 5% – which are normally the assumed targets. For that to happen the country’s central authorities would have to engineer policies that cause consumption to grow at least about 6% to 7% with investment remaining at roughly 1%.
So, to put it in simple terms, any lower consumption growth rate would mean that China would really not be able to rebalance its economy within a decade and maintain the current GDP to growth rates.
So for instance, if we look at China with consumption growing roughly at about 4% per annum, let’s say, before the pandemic – and it’s actually been much less since – one asks is a 6% to 7% growth rate in consumption even possible? To be honest, as it stands, no country in history at China’s current stage of economic development has prevented consumption from decreasing, let alone driving it to increase at such a rate, considering specifically that up until now China’s economy has sort of artificially been propped up by the central authorities.
SIMON BROWN: Yes. And that’s my last question. [President] Xi Jinping into his third term consolidation of power – does that hinder process? In other words, almost make people too afraid to speak up, or is he sort of the right person and can wield the stick? Is his consolidation in your mind a good thing or a bad thing?
CASEY SPRAKE: To be honest, I think at this point it’s probably more damaging to the outlook for the Chinese economy. This consolidation of the power at the top of China’s government structures, as you just mentioned, has really served to further stifle any policy debates or more open thinking.
And then this is happening at a time just as China’s past growth engines have begun to stutter. So I really believe as a result of this there seems to be very little that China’s authorities will or even can for that matter do to reverse the country’s declining growth trend.
So, falling short of a transformation at the real heart, the structure, of China’s government – which of course is highly unlikely at this point – I think the international markets are going to have to come to an acceptance of much lower growth rates for China to come.
SIMON BROWN: I think that is the answer. Much lower growth rates from China.
We’ll leave it there. Casey Sprake, investment analyst for fixed income at Anchor, I really appreciate the early morning insights.
Listen to the full MoneywebNOW podcast every weekday morning here.