Published On: Thu, Feb 8th, 2024
World | 2,062 views

China’s ‘flashing red’ warning signs and what they spells out for the global economy | World | News

China’s economy and financial markets face a “perilous” future with key indicators “flashing red”, an economist has warned.

Eswar Prasad, Professor of economics at Cornell University, rang the alarm bell as figures published on Thursday (February 8) showed consumer prices in the world’s second largest economy fell last month at the fastest annual rate in 15 years, missing analysts’ forecasts.

Professor Prasad told the FT: “A multitude of indicators are now flashing red, signalling a perilous period ahead for China’s economy and financial markets.”

China’s consumer price index fell 0.8 percent year on year in January, the official figures show. It is the fourth month in a row of declines and the biggest contraction since 2009. The fall was steeper than the 0.5 percent drop forecast by a poll of analysts carried out by Reuters.

The Asian giant’s economy is grappling with a prolonged property sector slump, weaker export revenue and months of turmoil with share markets slumping, losing trillions of dollars of value.

Professor Prasad pointed to persistent deflation and stock market slumps which suggested household demand as well as private sector confidence remain weak, thus posing “significant risks” to China’s growth prospects.

After China slipped into deflation in July, a number of economists and analysts have warned business and consumer confidence could be undermined should it persist.

When prices start falling, people expect them to continue to go down. This expectation lead to people spending less today as they hope to buy at a cheaper price tomorrow. If prices fall, businesses wil likely make less profit.

Laith Khalaf, Head of Investment Analysis at AJ Bell told one month’s inflation reading shouldn’t be taken as gospel, especially when the timing of Chinese New Year can impact on consumer demand.

But he added: “The bigger picture is China has been experiencing deflation for the last six months or so. While that may sound like a nice soothing tonic for those in developed economies who are still coming to terms with the worst inflationary crisis in a generation, sustained deflation is actually a serious problem because it undermines confidence amongst consumers, businesses and investors.

“More generally the Chinese economy is struggling as a result of a property slowdown, and when the US presidential hopeful Donald Trump starts talking about imposing tariffs in excess of 60 percent on Chinese imports, that doesn’t exactly steady investors’ nerves, and the issue of Taiwan also hovers over investor sentiment.”

Mr Khalaf said the Chinese government is under pressure to stimulate its economy, but not uncommonly it already has a high debt to GDP ratio so will be wary of cutting interest rates too far below that of the US, in case it triggers a flight of capital across the Pacific.

He added: “Things look pretty bleak for Chinese investors right now, but when stocks are at such a low ebb, it’s usually a time to be thinking about buying in rather than selling out.”

Henry Ince, an investment analyst at Hargreaves Lansdown, told that last year proved far from tranquil for China investors. He pointed to record youth unemployment, a declining population and debt, besides deflation, as ongoing challenges for policymakers.

Mr Ince said: “Policymakers have taken broad-based, incremental measures to support the economy. However, we are yet to see a ‘bazooka’ or a game changing policy to reassure the market who are calling for decisive action to be taken.

“Any major developments here could help confidence and provide short-term support for markets. But should this be fuelled by more borrowing, it could do more harm than good in the long run.”

The FTSE China index fell 16.63 percent in 2023, driven mainly by challenges in the real estate sector. Foreign direct investment (FDI) into China also turned negative for the first time since the late 1990s, according to Mr Ince.

He said: “As we approach the Chinese New Year – The Year of the Dragon, the world’s second largest economy appears to be on a difficult path. Despite its recent setbacks, the symbolism of the Dragon, representing success, strength, and power, echoes the qualities China has demonstrated during its multi-decade ascent.

“It’s also associated with being brave and courageous, two traits that would seem crucial to investing in China right now.”

But according to Mr Ince there are reasons for optimisim, including an IMF forecast of 4.2 percent GDP growth versus 1.4 percent for advanced economies and 2.9 percent globally.

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