In an article for the Financial Times, Ruchir Sharma, the chairman of Rockefeller International, expressed his belief that the confidence in China’s economic rebound from Covid-19 restrictions is not grounded in economic realities. He argued that there are indications of underlying weaknesses in the Chinese economy, but Wall Street analysts are not openly discussing them.
Sharma highlighted several indicators to support his claim. For instance, while Wall Street’s assumption of 5% GDP growth would suggest corporate revenue growth of 8%, it only rose by 1.5% in the first quarter. In fact, corporate revenue is slower than GDP in 20 out of the country’s 28 sectors. The MSCI China stock index has also experienced a decline of 15% from its peak in January.
Moreover, Sharma pointed out that imports, which serve as a strong indicator of consumer demand, dropped by 8% in April. Additionally, credit growth in China last month was only half as fast as predicted. He also highlighted the rising youth unemployment rate, which has reached 20%.
According to Sharma, these facts shed light on the root cause of the economic deterioration. Since 2008, China’s economic model has relied heavily on government stimulus and mounting debt, particularly in the property markets. However, Chinese debt service now accounts for a significant portion of disposable income, excess savings in China are considerably lower compared to the US, and the country’s growth potential is limited due to a shrinking population. Sharma argued that a growth model based on stimulus and debt was always unsustainable, and it has now lost momentum.
Rather than acting as the main drivers of growth, the property market in China has fallen into a debt crisis. The difficulties in financing this debt have had a ripple effect across various markets, resulting in a faster slowdown in industrial sectors compared to consumer-related firms.
Despite these challenges, many Western observers continue to hold onto the belief that China’s rebound is still attainable, which Sharma finds detrimental for eager investors. He emphasized that this optimism has already led to significant financial losses in China over the past few months. He also warned that global growth may be weaker than expected in 2023 if the hope of countering a US downturn with a China reopening boom does not materialize. Sharma called for an end to this charade before the consequences worsen.