China’s much-anticipated economic recovery isn’t turning out to be as ebullient as some bullish investors hoped. And yet investors looking to policy makers to power stocks higher with aggressive stimulus might be disappointed. China’s growth is indeed recovering—a contrast to slowing economies in the U.S. and elsewhere—but not at the robust pace expected. That leaves the world’s second-largest economy in a difficult in-between.
Just on Wednesday, data showed that China’s exports fell 7.5% in May from a year earlier, a much steeper drop than economists had projected and the first contraction in three months. That, along with other weaker data points lately, has sparked hopes for more stimulus to rev up growth. But policy makers so far appear more intent on stabilizing the economy rather than supercharging it.
Chinese stocks, in turn, have lost 7% over the past three months. It’s a stark comedown from the fall, when Chinese stocks surged for three months after Beijing lifted its harsh Covid-19 restrictions in late October.
Of course, policy makers have rolled out some efforts to help the recovery—like lowering deposit rates to nudge Chinese savers to spend more. Lenders including Industrial and Commercial Bank of China, China Construction Bank and Bank of China are now offering 2.45% and 2.50%, respectively, on three- and five-year time deposits, down by 15 basis points from September.
But so far, these efforts don’t seem to have persuaded households—or companies—to do so. For that to happen, TS Lombard Chief China Economist Rory Green says employment and income prospects need to improve to help repair confidence.
BCA Research Chief Strategist Arthur Budaghyan in a recent note said consumer spending will likely keep growing since Covid-19 restrictions have lifted, but at a slower pace than in the past.
As for companies, those on China’s mainland are among the most debt-laden in the world, Budaghyan adds. Combine that with a lack of government stimulus and lackluster demand, and these businesses likely won’t rush into investing, expanding, or hiring. That could be yet another obstacle for continued economic momentum.
For now, Chinese policy planners are in a “wait-and-see mode” about whether the economy will regain momentum on its own, says Shehzad Qazi, managing director at research firm China Beige Book. If growth disappoints in the second quarter, Qazi expects Beijing will roll out more stimulus. TS Lombard’s Green also expects more measures, along the lines of accelerated use of local government bond quotas, cuts to the required reserve requirements at banks to spur lending, and support for the real estate market with reduced down payment requirements.
But it isn’t clear if such measures would jump-start growth. And Beijing remains wary of exacerbating the longer term challenges it has tried to tackle in recent years, such as high levels of debt throughout its economy, including at the local level, financial speculation, and the excesses in the property market.
Another reason China might not be able to rely on its old playbook of leaning on infrastructure and construction to juice its economy: It might not have enough blue-collar workers to take on these projects. By 2025, the manufacturing sector is expected to see a shortfall of 30 million workers, according to Budaghyan. The silver lining: China is likely to keep rolling out efforts to put a floor under its economic growth.