What’s next for China’s economy?

Episode Summary

Executive Summary: Goldman Sachs’ Wei Shan argues China’s post-reopening rebound faded because pre-pandemic imbalances, supply-side pandemic support, and later crackdowns on property, internet and credit left households and private firms weak. He expects moderate easing, 5.4% full-year GDP growth, and slower medium-term growth as Beijing prioritizes security and structural rebalancing over aggressive stimulus.

Main Topics: China’s post-reopening recovery lost momentum (Priority: 5/5): The initial post-lockdown rebound was strong in Q1 but weakened in Q2, disappointing expectations that reopening would spark a broader and longer-lasting lift in growth and spillovers like commodity demand and travel. Why the recovery disappointed (Priority: 5/5): Wei Shan attributes the weaker rebound to pre-existing economic imbalances before COVID and to China’s distinct pandemic response, which supported production and exports more than household demand. Growth outlook and forecast revisions (Priority: 5/5): Goldman expects sequential improvement from Q2 to Q3 and full-year GDP growth of 5.4%, but the forecast was cut after stronger-than-expected Q1 data gave way to weaker April-May readings. Sector divergence in the economy (Priority: 4/5): Performance varies sharply across sectors: SOE investment is strong, services are recovering, while property remains a major drag with ongoing declines in land sales and housing starts. Youth unemployment and labor market mismatch (Priority: 4/5): High youth unemployment reflects cyclical weakness in services and structural mismatches from rising college attainment and shifting demand toward technical and strategic industries. Policy response: easing, but limited (Priority: 5/5): The expectation is for moderate monetary easing and some targeted support, but not a large fiscal or property rescue because policymakers are constrained and growth is no longer the sole priority. Longer-term tradeoff between growth and security (Priority: 5/5): The discussion frames China’s medium-term slowdown as a consequence of prioritizing security, de-risking, and self-reliance over maximum growth, implying a structurally lower growth path.

Key Arguments: China’s reopening boost was short-lived; the recovery lasted roughly one quarter before fading in Q2. Pre-pandemic imbalances and prior regulatory tightening left the economy vulnerable before COVID even began. Unlike Western economies, China supported supply more than household demand, so consumers did not receive cash transfers to sustain spending. Services and contact-intensive sectors still have room to recover, so there is some organic upside left in consumption. Exports are expected to stay roughly flat this year, with some near-term base effects but better year-over-year comparisons later in 2023. Property remains the largest downside risk because of its broad supply-chain and consumption linkages. Youth unemployment is both cyclical and structural, driven by weak services demand, higher college enrollment, and labor-market skill mismatches. Policy easing will likely be modest: easier monetary policy first, limited fiscal expansion, and targeted sector policies rather than a major stimulus package. Confidence is hard to restore without a major shift in policy toward private enterprise and away from uncertainty. Long-run growth expectations should be lower because China is accepting tradeoffs between growth and goals like security, deleveraging, and self-reliance.

Data Points: Q1 recovery: Strong - China’s reopening rebound was described as good in the first quarter before fading in the second quarter. Q2 recovery: Fizzled out - Wei Shan said the reopening impulse only lasted for one quarter and weakened noticeably in Q2. Youth unemployment rate (16–24): 20% - Official current youth unemployment rate cited as very high. Youth unemployment rate in 2019: 10% - Used as the comparison point showing the rate has doubled since 2019. Share of young people attending college: More than half - Structural factor contributing to labor-market mismatch and rising graduate supply. U.S. comparison for college attendance: About one-third - Provided to show China’s younger cohort is much more educated than the U.S. equivalent age group. Current full-year GDP forecast: 5.4% - Goldman’s base-case projection for China’s 2023 GDP growth. Earlier 2023 GDP forecast: 6.0% - Forecast lifted in March after a strong first-quarter print, then revised down. Interest rate cut: 10 basis points - Recent monetary easing action taken by China’s central bank. Expected policy rate cut: Another 10 basis points - Goldman expects an additional rate cut in the fourth quarter. Expected reserve requirement ratio (RRR) cut: One more cut this quarter - Goldman expects further monetary easing via reserve requirements. Medium-term growth forecast for 2025: 4% - Goldman’s cautious anchor for China’s growth by 2025.

Pivotal Quotes: "This is not something we have seen in previous cycles, that this entrenched and pervasive lack of confidence playing out in the Chinese economy." — Alison Nathan: Sets up the discussion on why China’s current slowdown is unusually confidence-driven. "This is a very difficult environment. Unfortunately, it doesn't seem to be an easy fix here." — Wei Shan: Summarizes the challenge policymakers face in restoring growth and sentiment. "We think the security part is more important." — Wei Shan: Explains why Goldman expects policymakers to prioritize security over faster growth in the medium term.

Implications: China’s growth likely stabilizes but at a lower rate than pre-COVID norms. Investors should expect selective stimulus, continued property weakness, and a policy framework that favors security and control over a strong cyclical rebound.