China's economic landscape has raised alarms for a second consecutive week, prompted by last week's dismal trade data and confirmation of a slide into deflation. This led to a more than 3% drop in Chinese shares, marking the worst performance among major economies' markets.
The question now is whether this week will witness a recurrence of the sell-off, given the impending release of China's final round of July economic data, covering retail sales, production, and investment.
Should these figures fall below expectations, it could trigger another wave of concern and unease among investors who fear that their bets on a Chinese economic rebound might have faltered.
Initial predictions indicate a minor uptick in retail sales, with a forecasted rise of 3.6%, compared to the 3.1% increase in June. Industrial production is expected to improve to 4.7% from June's 4.4%, while fixed asset investment might slightly decelerate to 3.4% from 3.8%, although it could fare better after adjusting for deflation.
Unemployment is predicted to remain steady at 5.2%, but the noteworthy youth unemployment rate reached a record 21.3% in June.
China's unexpected 14% decline in exports and 12% drop in imports caught many by surprise. The deflation reading, although widely anticipated, was a bit better than forecasted, coming in at a slight 0.3% fall in the annual rate compared to the predicted 0.4% dip.
However, the latest consumer price index data for July raises questions about the extent of the deflationary trend. This was mainly attributed to a significant 26% decrease in pork prices, causing food prices to drop by 1.7% for the month after a 15-month rise—a significant shift.
While the National Bureau of Statistics (NBS) indicated that non-food prices remained unchanged after a 0.6% decline in June, various sectors experienced fluctuations. Notably, clothing prices increased by 1.0%, housing costs rose slightly by 0.1%, health costs saw a 1.2% rise, and education expenses grew by 2.4%. In contrast, transport prices continued to decrease by -4.7%.
Chinese authorities and state media have downplayed the threat of deflation, with Liu Guoqiang, a deputy governor of China's central bank, stating last month that deflation risks would not be a concern in the latter half of the year. However, it's unlikely that the government's 3% consumer inflation target for the year will be met.
The NBS predicted that inflation would gradually rise in the coming months, with chief statistician Dong Lijuan noting, "With the impact of a high base from last year gradually fading, the CPI is likely to rebound gradually."
July's core consumer prices, excluding food and energy, rose by 0.8% year-on-year, the highest since January, up from June's 0.4% gain. Additionally, monthly consumer prices unexpectedly increased by 0.2%, beating forecasts of a 0.1% decrease and marking the first rise in 6 months. The trajectory of pork prices in the upcoming months will significantly impact the inflation outlook.
Economists at Moody's anticipate soft data from this week's releases but maintain confidence in the strength of China's economy. They expect a decline in retail sales growth, which they attribute partly to overstated softness due to base effects. Despite muted spending on goods, they note a healthier pace of household spending on services. Fixed-asset investment is also predicted to weaken slightly year-on-year.
However, Moody's remains optimistic about a gradual economic recovery into 2024, driven by targeted stimulus measures to encourage private investment and business sentiment.
Nevertheless, the looming risk of prolonged disinflation poses a serious concern. Extended disinflation could hit debt-ridden companies in the property and construction sectors, along with local and provincial governments, making survival a challenge.
Chinese property developer Country Garden has issued a warning that it could face a loss of up to $7.6 billion USD (over $11 billion AUD) for the first six months of this year.
This anticipated loss stands in stark contrast to a $265 million USD profit reported for the first half of 2022.
Country Garden conveyed its forecasted loss to the Hong Kong Stock Exchange, stating it "expected to record a net loss ranging from approximately RMB45 billion ($6.24 billion USD) to RMB55 billion ($7.6 billion USD) for the six months ending June 30, 2023."
Moody's, the rating agency, downgraded Country Garden's credit standing from B1 to Caa1 on Thursday. A Caa1 rating indicates a significantly poor credit standing and high credit risk. Moody's Senior Vice President, Kaven Tsang, noted the downgrade reflects the developer's increased liquidity and refinancing risks, owing to constrained access to funding, heightened financial inflexibility, and substantial refinancing needs.
The developer defaulted on $22.5 million USD in interest payments due on debt valued at $1 billion USD, triggering a 30-day grace period to rectify the payment. Failure to do so could erode market confidence and hamper access to funding.
Country Garden's shares closed at 98 Hong Kong cents on Friday, hitting an all-time low of 89 cents, marking a nearly 30% drop during the preceding week.
Though Country Garden is China's second-largest developer, its losses pale in comparison to those of China Evergrande, which is grappling with insolvency.
Last month, Evergrande, once China's largest real estate firm, revealed a combined loss of $81.1 billion USD in 2021 and 2022. These losses emerged as the firm, which defaulted on debts in late 2021, belatedly reported financials to investors. With an estimated $300 billion USD in debts, Evergrande's struggles remain substantial.
Numerous other developers are also grappling, underscoring the property sector's vulnerability in China. Any attempts to stimulate the economy will likely falter without substantial support and recovery measures for the property sector as a whole.
Next week's July property data for China, covering investment, loans, and prices, will provide a clearer picture of the sector's challenges and the broader economy's burdens.
