Morgan Stanley Trims China's Economic Growth Forecast to 4.7% in 2023

Morgan Stanley
(source:AP Photo/Ng Han Guan).
Morgan Stanley has dialed down its projections for China's economic growth this year, prompted by a series of slowdown indicators within the nation and concerns over the property sector.

Quoting Channel News Asia on Friday (August 18, 2023), Morgan Stanley now envisions China's Gross Domestic Product (GDP) growing by 4.7% this year, a dip from the earlier estimate of 5%, as per a recent note.

The Wall Street-based bank has also lowered its forecast for China's 2024 GDP to 4.2% from the previous 4.5%.

Earlier this week, J.P. Morgan slashed its China GDP growth forecast for 2023 to 4.8% from the prior 5%, while Barclays reduced it to 4.5%.

Meanwhile, China has maintained a growth target of around 5% for the year.

Morgan Stanley's downward revision is due to "factoring in the steeper-than-expected slowdown in capital expenditure amidst the decline in property sector debt and local government financing vehicle (LGFV) debt, with ongoing effects on consumption," said the team of economists led by Robin Xing in the Morgan Stanley note.

As it's known, China's property sector has been grappling with a liquidity crisis since late 2021, triggered by the collapse of China Evergrande Group, which set off a series of debt defaults.

Worries about the ripple effects spreading to the country's largest private developer, Country Garden, and asset manager Zhongzhi Enterprise Group's announcement of a liquidity crisis and impending debt restructuring only heightened concerns.

"Fears of misallocation could make early policy responses hesitant, worsening the debt/deflation spiral," Morgan Stanley explains.

China's Sluggish Economy Casts a Shadow on Global Growth Prospects

For over a quarter-century, China has been synonymous with relentless growth and dynamism. Its 1.4 billion citizens have increasingly embraced global commodities like Hollywood movies, South Korean electronics, and iron ore mined from Australia.

The global economy has thrived on this powerhouse of growth seemingly without bounds. Yet today, this very engine stumbles, ushering in worrisome risks for Chinese households and the global economy. As reported by Yahoo Finance on Sunday (August 13, 2023).

China has long stood as a core pillar of globalization, reaping profits and is now holding the world's last wildcard amid extraordinary uncertainty for the global economy.

These risks have been amplified over recent weeks through a series of developments. China's economy has slowed, dampening hopes of a robust post-extreme-COVID-19 expansion.

This week brought data revealing that China's exports have declined for three consecutive months, while imports have shrunk for five months in a row – further indicators of sluggish prospects.

Then came news of falling prices across various goods, from food to apartments, amplifying fears that China teeters on the brink of deflation – a sustained decrease in prices – a sign of lethargic commercial activity.

As a sign of deepening strain in China's property market, the crossroads of finance, construction, and household wealth, real estate developer Country Garden defaulted on bonds, estimating losses of up to $7.6 billion in H1 2023.

China's Slowdown Ripples Across the Globe

For Chinese workers and households, these events only add to their troubles. Globally, China's economic weakness signals a dwindling demand for essential goods, ranging from soybeans from Brazil to American beef, and even luxury goods from Italy. It could also affect demand for oil, minerals, and other industrial building materials.

"A slowdown in China will certainly weigh on global economic prospects. Since China is now the world's top commodity consumer, its impact will be significant," noted Macquarie economist Larry Hu, based in Hong Kong, as quoted by Yahoo Finance from The New York Times.

China's Economic Contribution

Over the past decade, China has contributed to over 40% of global economic growth, compared to 20% from the United States and 9% from the 20 eurozone countries, according to a recent analysis by BCA Research.

Adding to the concerns is the growing realization that China's authorities are constrained in their choices to revive the economy, given the accumulating debt, which is now estimated to be at 282% of national output, surpassing even that of the United States.

Economist: China's Economic Slowdown Could Prolong

Economists predict that China's economy may be in for a prolonged slowdown.

Quoting CNBC International on Tuesday (July 25, 2023), China's Gross Domestic Product grew by 6.3% year-on-year in the second quarter of 2023.

This figure fell below market expectations for a 7.3% expansion after the world's second-largest economy emerged from the COVID-19 lockdown.

On a quarterly basis, China's economic output grew by 0.8%, a deceleration from the 2.2% quarterly increase seen in the first three months of the year.

Meanwhile, youth unemployment rates reached a record high of 21.3% in June.

Julian Evans-Pritchard, head of China economics at Capital Economics, noted in a memo that China still faces a number of challenges in recovering its economy.

These challenges include domestic demand, financial issues in the property sector, and external factors.

"Overall, the Politburo meeting struck a dovish tone and made clear that the leadership feels there is more work to be done to get the recovery on track. This suggests that some further policy support will be rolled out over the coming months," said Evans-Pritchard.

"But the absence of any big or specific policy announcements does suggest a lack of urgency or policymakers struggling to come up with fitting measures to prop up growth," he added.

Similarly, Rory Green, Head of China and Asia Research at TS Lombard, sees that China's economy has not yet fully recovered from the shocks of the prolonged COVID-19 pandemic and lockdowns.

"There's a chance that if Beijing doesn't intervene, the Covid-19 cycle of destruction can align with some of China's structural headwinds – particularly around the size of the property sector, irrespective of the global economy, demographics – and push China into a significantly slower growth path," he explained.

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