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Is China’s recovery on the verge of stagnating?

Is China's recovery on the verge of stagnating?

China’s youth represent only a small portion of the country’s workforce and an even smaller portion of the workforce. After all, many of the 16 to 24-year-olds are still at school or university and are therefore not looking for work. In recent years, however, their job prospects have attracted attention and raised the alarm. Last month, China’s overall unemployment rate fell from 5.3% to 5.2%, according to figures released May 16. This improvement was overshadowed by a rise in youth unemployment to 20.4%, the highest level since data began in 2018.

The huge focus on issues such as youth unemployment is a symptom of China’s emerging “confidence trap,” argue Citigroup bank Xiangrong Yu and his colleagues. Although the country’s economic recovery in the first three months of the year far exceeded expectations, investors seemed to focus on the ‘weak links’. These include lackluster imports, soft inflation, the failure of manufacturing to match strength in services – and unemployed youth. Foreign investors have soured China as geopolitical tensions have mounted: On May 17, the yuan slipped past seven against the dollar. But “pessimism is also significantly widespread and persistent on the domestic side,” Citigroup economists note.

It is evident in China’s stock markets, which have given up much of their gains from the initial reopening rally. And pleasant surprises in the economic data have barely registered in the creepy fixed income markets: government bond yields are only slightly higher than they were in the depths of the covid-19 pandemic. Although consumer confidence looks healthier than last year, it will remain well below the level in 2019.

China’s uneven recovery has so far failed to improve mood. The danger now is that the vote will sink China’s recovery. For example, credit grew surprisingly slowly in April. Retail sales, while strong compared to last April when Shanghai and other major cities went into lockdown, were weak compared to professional forecasts (see chart). Industrial production also fell short of analysts’ expectations.

Investment by state-owned companies was moderately high, but spending by private companies was only 0.4% higher in April than a year earlier, according to research firm Oxford Economics. Part of the explanation for this disappointing growth can be found in the Chinese real estate market, where an incipient recovery now seems doubtful. At the insistence of the government, developers have prioritized completing unfinished construction projects, rather than investing in new ones. The number of homes started decreased by more than 20%, while the completed floor area increased by almost 19%.

The weakness in the real estate market has prompted some economists to lower their growth forecasts for this year. For example, Ting Lu of Nomura, a bank, lowered his grade from 5.9% to 5.5%. “The recovery has stalled,” he explained, “partly because of Beijing’s inability to boost consumer and business investor confidence. As the disappointment sets in, we see an increasing risk of a downward spiral.”

China could try to revive the recovery and confidence by more vigorously easing monetary policy. Inflation fell to just 0.1% in April, leaving ample room for stimulus. But as China’s official growth target for this year is just 5%, the government won’t be quick to help. Foreign investors and Chinese consumers have little faith in China’s recovery this year. The government’s unambitious growth target, set in March, suggests that it is not very confident either.

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