Arguably, nothing has gone right for China in 2023.
The year began in hopeful mood. After three years of pandemic-related isolation and a messy exit from president Xi Jinping’s zero-Covid policy, it was supposed to be a comeback year for Asia’s largest economy.
Nothing of the sort happened. China’s year marched to a steady drumbeat of escalating crises and disappointing data.
In effect, global investors are saying to China: ‘We’re just not that into you.’
Retail sales growth hovers in the mid single-digit range (monthly consumer spending rose at an average annualised rate of 4.7% in the five months to the end of October, according to the National Bureau of Statistics). Most analysts at the start of 2023 projected double-digit growth.
The property sector is increasingly beleaguered. If anything, its predicament is growing more, not less, precarious. Property sales fell 7.8% year on year in the first 10 months of the year, against a 7.5% decline in the first three quarters. Efforts to mitigate the slide by cutting borrowing costs and relaxing restrictions on home ownership have fallen flat.
But perhaps an even bigger point of concern is the fact that direct investment liabilities – a broad measure of foreign direct investment that includes foreign firms’ retained earnings – were negative $12 billion in the third quarter, according to the State Administration of Foreign Exchange.
That number should be treated with respect. It is the first quarterly deficit since SAFE started compiling this data in 1998.
At least part of that fall is surely due to multinationals repatriating earnings out of the country. But most of it is driven by two negative factors China will find it hard to reverse.
The first is a long-term secular process of de-risking and diversification, with Western corporate and financial institutions increasingly wary of putting capital to work onshore in the country. Much of that change is a product of the pandemic, with foreign multinationals (encouraged by investors and governments) keen to make their supply chains less dependent on a single market.
But this shift also pre-dates Covid. Western FDI into China peaked in mid 2018 and has fallen ever since. The share of US goods imported from China began to decline at the same time, having risen inexorably from the 1980s on. The shortfall has been replaced by imports from markets in Latin America and the rest of Asia, data from Moody’s Analytics and the OECD show.
Negative narrative
Which brings us to the second point. Think of it as a variation on a certain schmaltzy late-2000s romantic comedy that no one in their right mind would ever want to see. In effect, global investors are saying to China: “We’re just not that into you.”
For decades, the narrative on China has been unrelentingly upbeat. It skirted the Asian financial crisis in the late 1990s thanks largely to its closed capital account. When the global financial crisis hit, it dodged recession by flooding its economy with stimulus capital. For years, global firms bought into its long-term story, despite policymakers’ incrementalist approach to fully opening key sectors, notably financial services.
Until now. Beijing is finding out, at a very inopportune moment, that narratives can swing both ways, either bolstering a market or harming its cause. And when a negative narrative clamps onto the minds of investors – see post-Brexit Britain, or Hong Kong during its own self-isolating Covid phase – it can be very hard to prise loose.
That explains why in nine of this year’s 11 months to date, fund managers sold more mainland China equities by value than they bought, according to Goldman Sachs. When analysts and investors sized 2023 up, this wasn’t supposed to be the direction of play.
Will 2024 be worse?