A mix of political and financial factors is affecting the second world economy.

We used to see the growth of Chinese GDP with values three or four times higher than those of Europe and the USA so much so as to think it was a country in its own right, where the recurring crises experienced in the West could never touch the factory of the world.

We have, over the years, opened our doors to Chinese products, thinking we can do good business by buying and reselling their goods instead of produce them in the West.

The most structured companies have started the massive relocation to China in order to reduce production costs and maximize contribution margins.

Several years have passed before we realized that producing away from home could also have negative implications on the product, on logistics, on outsourced work, which was not always offset by higher margins on sales operations.

Today, China has a slightly less bright image than in the past in the eyes of the world, a market that is slowing down and the large multinationals that are looking around, outside the Chinese borders, to find new production solutions.

But what are the causes of this slowdown of the Dragon?

Rossella Savojardo made an analysis of the three major causes of the weakening of the Chinese market, which are represented by political, economic and social reasons.

China will avoid recession both this year (+3.5% GDP) and next (+4.5% %), with inflation that compared to Western countries will be low (2.8% in 2022 and 1.9% in 2023). But the strength of the Dragon's economy has weakened in the last period and the causes seem to be at least three according to the experts.

The pandemic and the zero-Covid policy

Covid-19 cases in China have marked a new increase to over 31,000 infections, a record since the beginning of the pandemic.

This has again led to generalized lockdowns across the country with the closure of some important production centers as well. Jian Shi Cortesi, investment director Asia and China Equities at GAM, explains that “the Chinese government is faced with a trade-off between the deaths caused by Covid and the economic slowdown.

Thanks to the success of the containment measures taken in China in the last two years, less than 0.1% of Chinese people have been infected with Covid and China has registered only a few thousand deaths (compared to 1 million recorded in the US).

This, according to Shi Cortesi, probably makes the Chinese population highly vulnerable to Covid compared to countries that are achieving herd immunity.

The most vulnerable segment of the Chinese population is not inclined to be vaccinated. In the future, according to the expert, there will probably not be an immediate change in the Chinese zero Covid policy.

However, “restrictions are increasingly practical. Widespread lockdowns are now rarer. Instead, we are seeing more targeted closures in order to balance the Covid restrictions and the economic impact".

Evergrande and the real estate crisis

Not just Covid. In China, the real estate sector is also faltering, also due to the dangers deriving from non-performing debt.

“Between 2010 and 2020 the real estate market in China was robust, with prices rising by 60% in the top five of the country's 70 cities.

This has led to some home buyers complaining about the affordability of properties and the government has become concerned that this could lead to a real estate bubble,” Shi continues to explain, highlighting that for this reason in 2020 and 2021, some cities in China tightened the rules for buying a house in an attempt to cool down the real estate market.

Meanwhile, the government has ordered banks to tighten lending criteria to heavily indebted property development companies.

The combination of these measures has created some liquidity problems for high-risk real estate development companies, which, in some cases, have resulted in insolvency.

"Troubled builders have halted some projects. Sentiment has turned quite negative for the sector, resulting in a tightening of financial conditions."

To stabilize the real estate situation, Beijing has implemented increasingly incisive support policies, and it is precisely by looking at the latter that the Gam expert sees a probability very low that the slowdown in the real estate sector leads to systemic risks in China's financial system.

“However”, he continues, “the boom years of the real estate sector are likely to be behind us”. In fact, according to some experts, annual sales of new homes are expected to drop to 1-1.2 billion sq m in the next few years, compared to 1.6 billion sq m in 2021. This will act as a brake on the growth rate of the gross domestic product of the Dragon.

Is China's problem youth unemployment?

The analysts of Credit Suisse shine a light on this point, who recall that when the workforce of a country is shrinking, as is currently the case in China, having a high youth unemployment rate exacerbates the resistance to GDP growth.

“Young people aged between 16 and 24 have a higher marginal propensity to consume”, they explain in the first place, “ for any given level of global unemployment rate, a higher youth unemployment rate therefore has a proportionally larger negative effect on consumption growth.

In the medium term, therefore, Credit Suisse believes that structurally high youth unemployment will translate into lower growth potential, given that this reduces the effective input of jobs in the economy and also exerts downward pressure on wage growth.

«Based on our assessment of various factors such as rates of technological progress and labor force shrinkage, we expect per capita disposable income growth to average around to 4.2% over the next five years, a sharp decline compared to the range of 8-9% before the pandemic", underlining the Swiss bank, "such a decline in trend growth should therefore remain a headwind for the growth in consumption of families".

Automatic translation. We apologize for any inaccuracies. Original article in Italian.