Column  Global Economy  2024.05.10

Business Sentiment Becoming Worse Despite Macroeconomic Indicators Continuing to Recover Gradually | Economic Conditions in China / Hearing

- Report on a business trip to Beijing, Chengdu, and Shanghai (January 22 to February 2, 2024) -

Chinese Economy

<Key Points>

  • The real GDP growth rate in the fourth quarter of 2023 was +5.2% year on year (y/y), registering a higher growth rate than in the preceding quarter (+4.9% y/y). Seasonally adjusted, however, annualized Q/Q growth rate was 4.0%, slowing down compared to the preceding quarter (+6.0% annualized Q/Q).
  • Except for real estate-related economic indicators, the major indicators such as industrial production, service production, capital investments in manufacturing, and the retail sales of consumer goods continued to recover gradually in general after they bottomed out in July. However, with the future of the economy being quite uncertain, business sentiment among corporate managers and consumers did not recover, rather became worse.
  • One reason for the widening gap between the recovery of macroeconomic indicators and the deteriorating business sentiment is that corporate profits were improving slowly. In order to make it look like the economic performance was improving, provincial governments mainly requested state-owned businesses expand production exceeding demand. This increased inventories, causing selling prices to fall as the balance between supply and demand deteriorated, which in turn reduced corporate profits. That led to the attitude of curbing production, capital investments, employment, and wages for the future – the cause of the downward trend in the economy that deteriorated the business sentiment among businesses.
  • Another reason is that the stagnation of the real-estate market was not stemmed. In China, individuals have invested 60-70% of their assets in real estate, but real-estate prices continued to fall, and it was uncertain when they would recover.
  • Since summer of last year, the central and provincial governments had announced various measures to revitalize the real-estate market, but none of them had an impact strong enough to reverse the downturn trend in real-estate prices, and the prices continued to drop.
  • Still another reason is that the recovery of confidence among private enterprises was delayed.
  • In order to break through this situation, it is considered necessary that the leaders who are responsible for the administration of economic policy in the Chinese government accurately recognize the harsh circumstances the Chinese economy currently faces and take effective and drastic measures to recover business confidence early.
  • At the National People’s Congress in March, the Chinese government is expected to announce that the expected economic growth rate this year would be around 5.0%, but the prevailing view is that it would barely manage to reach 4.7-4.8% as the government implements economic stimulative measures. Many experts reckon that if the government puts off effective measures such as the injection of public funds to recover the real-estate market, the economic growth rate would be highly likely to fall below 4%.
  • The future of the Chinese economy is quite uncertain, but major Japanese and German businesses do not intend to change the policy toward investments in China they have adopted in the past.
  • The recent policy of German businesses is to discover excellent Chinese engineers, take them to Germany, and let them train Germans. The major field of training would be digitalization technology, including electric vehicles, artificial intelligence, and IT.

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Business Sentiment Becoming Worse Despite Macroeconomic Indicators Continuing to Recover Gradually