China's Economic Slowdown: Causes, Impacts, and Investment Opportunities

China's economy faces a precarious situation with high debt and weakening growth, posing risks and potential investment opportunities.

### China's Economic Slowdown: Challenges and Opportunities Ahead
* 📉 China's economy is struggling and may not meet its growth target this year, with **hopes for a post-pandemic recovery fading**.
* 🏠 The property market is a significant factor in this slowdown, as it constitutes a **large portion of the economy**, similar to Spain before its financial crisis, leading to a potential **housing market correction**.
* 📊 Monthly sales by the top 100 developers have been **consistently declining**, and property prices have been **falling since early 2022**, indicating a **shift in demand and supply fundamentals**.
* 💰 Weak domestic demand has resulted in deflation, with retail sales growth dropping to just **2.7%**, prompting calls for government action to **stimulate the economy**.
* 🌍 Geopolitical tensions, particularly the ongoing trade war with the U.S., could exacerbate China's economic woes, with potential **tariff increases that may significantly impact GDP**.
* 📉 Total social financing has **ballooned to 300% of GDP**, indicating a growing debt problem that could lead to a **balance sheet recession**, characterized by **weak growth and high unemployment**.
* 📈 Despite these challenges, China's stock market appears **undervalued** with a cyclically adjusted price-to-earnings ratio of **11.2**, presenting a **potential investment opportunity** for contrarian investors.
* ⚡ While the economy faces difficulties, sectors like **electric vehicles and renewable energy** continue to perform well, showcasing China's strengths in specific industries despite broader economic challenges.

China's once flourishing economy has weakened and may fail to meet its growth target this year. Any rays of hope that remained for a post-pandemic boom have been quashed. But what went wrong with the world's second-largest economy, and is there still a glimmer of hope? What potential global impacts are there, and does this economic situation make China uninvestable, or does it present an opportunity to buy undervalued investments? And if you do enjoy our content, please remember to like this video, and if you haven't, subscribe to our channel. Now, there are many reasons behind China's slowdown in growth, but I'm going to focus on just four, and the first one is the property market. So, here's a graph from a paper by Rogoff and Yang. This was published in 2021, which looked at the size of the Chinese development sector as a proportion of the total economy. And notice the title here is Real Estate-Related Activities. So, it's a broad definition of not just construction but also the industries that feed into that, such as production.

of concrete, for example, and what's very noticeable is how concentrated the Chinese economy is in just this one sector. Now, that usually sets up a crisis down the road. And if you look at another country which also peaked at a similar level, that would be Spain, and that was just before the global financial crisis. That was a country which overinvestment gutter properties eventually led to a correction in the property market and a huge contraction in the Spanish economy. Now, at the time that the paper was published, many people said, Well, China's not the same as Spain. It's got a much more centralized economy. And if there is a problem, then the Chinese government will correct it before it gets out of control. However, to quote from the authors of the paper, Despite the repeated argument that China's different, we note that it shares striking similarity with other boom episodes in the run-up of housing prices, the scale of the construction sector, the debt accumulation, etc. Indeed, given the severity of many economic indicators, China's decades-long housing boom shows many signs of having hit a potentially

precarious Peak, and so it turned out to be. So, for example, if we look at the monthly sales by the top 100 Chinese developers, notice how monthly sales have been falling consistently, except for one brief period in 2023. And if we look at the year-on-year change in property prices, notice how they switched to falls in early 2022, and they haven't really recovered. In fact, the fall in prices seems to be accelerating. That's true of both newly built housing but also properties bought in the secondhand market. And economists from UBS noted that China's property demand and supply fundamentals have changed in recent years. Market confidence is low amid weak household income growth, and inventory levels are high, while destocking implementation has been slow. And that led to the bank downgrading its outlook for the real estate sector, such that it now expects new starts to bottom out in mid-2026. So, that's sometime in the future. You might be thinking, why does the property market matter? Surely, their own manufacturing powerhouse and

services can pick up the slack. Well, there's actually a strong wealth effect in China. If people's property prices are falling, they tend to spend less, so it does have a knock-on effect on the rest of the economy. Furthermore, local governments were sometimes funded by selling land to developers, so it's also created a problem in the revenue of those local governments and also servicing the debt that they built up while that source of income was ongoing. And a second and related problem is weak domestic demand. Now, one way in which a lack of demand is manifested in macroeconomic data is deflation. Whereas in the West, we've recently had a spike of inflation, you might be thinking deflation might not be a bad thing, but in fact, it sometimes signals an even deeper problem in an economy. Because if consumers don't have confidence to consume, then what you tend to see is that there'll be less demand for goods and services, companies will be cutting back on their staff, there'll be greater job insecurity, unemployment will rise.

and the economy can enter a kind of downward spiral that goes hand in hand with soft credit demand declining. Imports and all of this point to weakness of private demand. And if we look at something like retail sales, for example, in China, you can see that the year-on-year increase before the pandemic was typically 8% or higher; sometimes it was in double digits. Whereas after the pandemic, it's been very volatile and generally lower. The latest print was 2.7%, for example. And a previous governor of the People's Bank of China has come out and said that China needs to take swift action to reverse deflationary pressures. Now, it is surprising that he's spoken out because authorities last year, according to the FT, began quietly pressuring experts to stop talking publicly about economic problems, particularly deflation, in an effort to shore up sentiment in the market. Now, you can stop talking about it, but that's not going to make it go away. How could the government combat this situation? Well, fiscal stimulus is

one way, although there are problems to implementing that, as we'll see. And another thing is monetary stimulus, which The People's Bank of China is already implementing. Added to that, there are geopolitical tensions at the moment, which don't help. For example, there's the trade war with the United States, and whoever wins this election in November, whoever's in the White House, will probably keep these tariffs in place. And if President Trump wins, and the probability of that, according to polls as I make this video, is roughly 50/50, he's talking about increasing tariffs further. And those new tariffs would consist of a 10% blanket tariff on all imports and increases on existing tariffs on Chinese imports. And in total, those new tariffs would cost the US economy about 1.88% of GDP. So these new tariffs would hurt the US economy as well as the Chinese economy, but it would probably hurt the Chinese economy more. Now, according to UBS economists, this hike to 60% tariffs could knock 2.5

percentage points of Chinese GDP. Now, that would half its headline rate of growth. Half of that hit, according to those economists, would come directly from the drop in exports. But if the Chinese government does step in with some kind of stimulus, with policy support, then that could limit the headline fall to about 1.5 percentage points. But that would still be very painful for China. Now, as an investor, it really helps to understand the links between economics and markets. How does weak growth affect currency markets, interest rates, but also things like equity markets? That's the kind of thing you can learn as part of our community. For example, we create lots of tracker tools to help our community work out what's going on in markets, and then we discuss it on our chat forum. For example, we have lots of macroeconomic trackers, and these allow you to keep track of key indicators such as the UK yield curve, US jobs numbers, and so on. Plus, you get to chat to other members of the community via our chat application and ask a question whenever you want. Plus, we now have a library of several

hundred members only videos based on questions asked by our community. If you want to learn more about joining us, then just go to our website pensioncraft.com/slmh, and you'll find a link to that in the description below. Now, this combination of factors, combined with a lot of debt, may produce what some economists call a balance sheet recession in China. So, firstly, let's dig into the amount of debt. This is a number that's called total social financing by the PBOC, the People's Bank of China, and we can split it down into its components using this data from Goldman Sachs. So, what goes into total social financing? It's central government debt. To that, you add local government debt. LGFV stands for local government financing vehicles. Remember, those were the ones that were propped up by land sales previously, which have now started to slow down. To that, you add corporate debt and household debt, such that if you add them all up, they now make up 300% of GDP. So, far from deleveraging, which is what China was apparently trying to do before

the pandemic. What we're seeing at the moment is a burgeoning of that combined debt. So how can that lead to a balance sheet recession, and what is it? Well, it essentially has four steps, two of which we've already seen. The first one is an asset price collapse. This is what we've seen in the housing market, or if you're unlucky enough to be exposed to the Chinese stock market. Also there, you've seen a collapse in prices. Combined with that, we've got a very large debt overhang from the boom years, which the Chinese government hasn't managed to deflate yet. So take those two ingredients, and the next step in a balance sheet recession is one which is very rational on behalf of the consumers in a society, as well as the companies, which is that they decide to pay down their debt. If economic activity is weak, then presumably you're worried about repossession of your house or your business becoming bankrupt. So the right thing to do is pay down the debt. But if you do that, that money can't then be

spent investing back in your business or spending in shops, so consumption and investment fall as we enter this downward loop. At the same time, that reduces aggregate demand, so companies probably cut back on their staff, and that means higher unemployment. And if we look at youth unemployment in China right now, well, we could, if we have the data, which is now no longer published, but that was increasing rapidly before it stopped being published. Then we enter this downward spiral where economic activity is weak, the government has to stimulate the economy, and its revenue falls because economic activity is weak. So, it has to plug the difference with more debt. So, what gradually happens is that private debt becomes public debt, and the debt to GDP for government debt starts to increase rapidly. And that's exactly what many people now expect will happen, and it's certainly what happened in the case of Japan, which now has a debt to GDP ratio in excess of 250%. But the key problem here is that a balance sheet recession takes a long time to correct, and it leads to a period

of very weak growth that lasts a long time. So, the precarious position that the Chinese government now finds itself in is it's sitting on a mountain of debt. It's got a slowing economy, and it's not going to be able to afford to stimulate that economy without increasing the debt further. And it has to shrink the debt without crashing the economy, a very difficult combination of factors. Now, the effects of this weak growth will be felt all over the world. Now, this paper from 2016 is interesting because it shows you the effects of a 1 percentage point fall in Chinese GDP on GDP in other countries. Notice how the largest negative effects are for countries which trade most with China. So, a lot of these are small countries, countries like Indonesia, Malaysia, Philippines, and Singapore, but also some developed market countries like Australia, which sell a lot of commodities to China, and to a lesser extent, countries in the EU. So, this is not like Russia, where it had a fairly limited impact on global growth. The Chinese economy is much more systemically important. If they suffer

weak growth. It'll affect all of us. Another effect is that commodity prices would tend to weaken, particularly the commodities that China buys a lot of. For example, copper, which you can see here alongside Chinese GDP. So, it's Chinese GDP in the top panel, copper price in the bottom panel, and notice how when there's a surge in Chinese growth, copper prices surge. And when there's a slump in Chinese growth, copper prices slump. In fact, some people think that copper is a fairly good proxy for Chinese growth. And notice that recently, copper prices have been falling quite sharply. But it's not just copper which is affected; it would be other commodities like oil, but also iron, for example, which would be negatively impacted. So, commodity prices are one transmission mechanism by which China affects the rest of the world. Now, what is interesting is that if you look at the Chinese stock market versus another EM market, which is India, the two are very clearly diverged. The Indian stock market has been doing incredibly well. In fact, if you look at returns since

2018, you can see that it's almost neck and neck in terms of returns with the US. Compare that with China; it's actually fallen its stock market over this period. If you look at A-shares, and that's for a six-year period for which the stock market's gone nowhere. So, for now at least, it seems as if the Chinese stock market implosion has been fairly well contained. Although in the past, it has been the case that it's managed to spill volatility into global markets. For now, that seems not to be the case. But it's not all doom and gloom for China. There are some positives, and one positive is a direct result of the poor performance of its stocks, which is that they look very, very cheap indeed. So, for example, if you look at the cyclically adjusted price-to-earnings ratio, which is an expensiveness measure for stocks based on profits over the last decade, you can see that India looks far more expensive than even the US at the moment, with a 41.7 times Cape multiple. Compare that

with China, which is currently at 11.2 times. In fact, it's seldom being cheaper. So, if you are a contrarian and you do think that China is going to recover from this slough of growth, then perhaps this is an interesting opportunity. And it's certainly not true that the Chinese economy is a complete basket case. Although we're talking about it not meeting its growth goal of 5% this year, it'll still be very respectable growth compared to developed markets, for example. Furthermore, it's not going to be poor growth in all sectors. The sectors which the Chinese government has focused on with the greatest technology and the greatest value add, and that would include things like electric vehicles but also renewable energy, in those sectors, industrial production has been very strong, partly because of government support but also because some Chinese companies produce great products. And if we look at global market share for some of those industries, you can see that, for example, with solar panels, China now has almost 90% market share for mobile phone.

production almost 67% market share, and for wind power equipment 60%. So, it's still a very successful economy for those sectors. So, if you are going to invest, then perhaps that's where you should focus. So, I hope that's shown you some of the problems that exist currently in the Chinese economy and why I think it could take many years for those problems to be resolved. A balance sheet recession is not something that you can turn around quickly, but the fact that you actually know that it's happening, and that's because the Chinese government has the Japanese experience to draw on, perhaps that'll help them steer through the crisis and fix it more effectively. So, if you do want to learn more about investing, remember you can do that as part of our community. You can join us very easily, just go to our website pensioncraft.com, mhip to learn more. It's very friendly, we help one another, and generally, we try to help each other become better investors. And as always, thank you for listening.

China's Economic Crisis

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China's economy has weakened and may not meet its growth target this year, with the property market playing a significant role in the slowdown.

The country's development sector is heavily concentrated in real estate, leading to a crisis similar to Spain's before the global financial crisis.

Monthly sales and property prices have consistently fallen, with low market confidence and high inventory levels contributing to a bleak outlook for the real estate sector.

China's Economic Challenges: Falling Property Prices and Weak Demand

Falling property prices in China are leading to reduced consumer spending and creating revenue problems for local governments.

The country is experiencing weak domestic demand, manifested in deflation and volatile retail sales growth since the pandemic.

Geopolitical tensions, particularly the trade war with the United States, are exacerbating the economic situation, with potential new tariffs that could significantly impact both economies.

China's Economic Challenges and Debt Crisis

China's GDP growth is expected to drop by 1.

5 percentage points due to a decline in exports, with the government's stimulus efforts potentially limiting the impact.

The country's total social financing, which includes central and local government debt, corporate debt, and household debt, has now reached 300% of GDP, contrary to the intended deleveraging.

This burgeoning debt, combined with asset price collapses, is leading to a balance sheet recession, as consumers and companies prioritize paying down debt in response to weak economic activity.

China's economy is facing a downward spiral due to falling consumption and investment, leading to higher unemployment and weak economic activity.

The government's revenue is decreasing, forcing it to take on more debt, which is expected to increase the debt-to-GDP ratio rapidly.

This weak growth in China is projected to have a significant negative impact on other countries, particularly those that trade closely with China.

China's weak growth is leading to a decline in commodity prices, particularly for copper, oil, and iron, which are heavily influenced by China's economic performance.

The Chinese stock market has diverged from India's, with India experiencing strong returns since 2018 while China's stock market has struggled.

Despite the challenges, China's poor stock performance has made its stocks look very cheap, with a low cyclically adjusted price-to-earnings ratio compared to India and the US.

China's Economic Challenges and Opportunities

China's economy is currently struggling, with growth rates not meeting targets, but it still offers respectable growth compared to developed markets.

The government's focus on technology-driven sectors, such as electric vehicles and renewable energy, has resulted in strong industrial production and a dominant global market share.

Despite the current challenges, there may be investment opportunities in these key sectors, and the Chinese government's experience with previous crises could aid in a more effective recovery.