China Comes Clean About Its Economy. Too Little, Too Late?

At the beginning of the year, just after officials abruptly dropped an array of Covid restrictions that grounded the economy to a halt, the world’s second-largest economy was expected to rebound robustly, led by consumption from pent-up demand, and government help in languishing areas such as real estate and small-business loans.

A bullish outlook grew out of government pronouncements, media reports, and investor sentiment. Markets rallied.

All that has changed. Nearly all crucial parts of China’s economy are underperforming, from consumer demand to manufacturing to the long-ailing property sector, which accounts for more than a quarter of China’s total GDP. Markets have now lost most of their gains as subsequent months of data have shown no signs of recovery.

Initially, authorities displayed a conservative degree of concern by promising or issuing small spurts of stimulus measures. But after months of rhetoric proclaiming things are alright, officials are gradually admitting—or allowing public discussion of—the country’s economic plight.

This hit a high point last week when China’s new premier, Li Qiang, headed a high-level gathering of the country’s leading economists. Li said China was facing a critical stage in its attempt to recover, and it must “spare no time” in implementing a batch of targeted policies, according to state-run CCTV.

Experts who spoke at the gathering were even more direct. “There is a consensus among everyone that the recovery is below expectations. Initially, we thought the economy would quickly rebound after dropping epidemic control measures. But it’s now evident that the rebound has not been rapid,” Liu Shangxi, the influential head of the Chinese Academy of Fiscal Sciences under the Ministry of Finance, was quoted by state-owned China Newsweek.

“There were signs of an economic downturn starting from the second quarter of this year. This indicates that risks may be spreading and expanding, and there is little disagreement regarding this assessment,” he said.

The need to implement an active fiscal policy and a prudent monetary policy is obvious, Liu said. But traditional stimulus measures have reached a point of diminishing returns, he added. Other financial experts on the panel were equally downbeat.

This level of frank public reckoning with China’s woes is tantamount to government approval, as their comments are normally vetted beforehand.

To be sure, officials are still insisting things are going to be fine, and that help is on the way. But the measures have been too minor to sway investor pessimism, including this week’s extension of loan policies to boost banks’ willingness to engage with property developers, which is “far from enough [to stabilize] the sector,” Larry Hu, chief China economist at

Macquarie Group
,
wrote in a research note.

China’s traditional large-scale supply-side stimulus packages have focused on infrastructure in a country that is now flush with new highways, bridges, and airports, after decades of government-led projects. Measures to boost demand have worsened oversupply in manufacturing and real estate, and stoked local-level debt.

Despite the more open recognition of China’s faulty recovery, investors remain frozen by a lack of clear policy directions. Many frustrated local investors have resorted to relying on so-called “little essays”—unverified notes on social media that purport to know what policies are coming or which financial rumors are true.

Foreign firms are even more in the dark. China recently restricted outside access to once-public business and financial data. Then came a so-called anti-espionage law that experts say puts foreign businesspeople at increased risk.

The U.S. House of Representatives Select Committee on the Chinese Communist Party on Thursday is set to hold a hearing on these matters. Shehzad Qazi, chief operating officer and managing director of consultancy China Beige Book, is one of three experts invited to testify.

Qazi said the information environment in China has deteriorated radically in recent years due to censorship and elimination of independently produced economic data. Previous data security and the newer espionage laws have only made matters worse, he told Barron’s ahead of the hearing.

“Foreign firms now have very little visibility into the true economic conditions in China and even companies with which they’re doing business. Beijing forcing foreign firms to fly blind is not just bad for those companies, but bad for China,” he said.

This could be bad for China because it could lead to foreign investment drying up as companies are unable to acquire the information they need for due diligence purposes to work with Chinese suppliers or partners.

The new laws will also directly impact U.S. audits of Chinese companies. “If the auditing reports do not meet U.S., PCAOB [Public Company Accounting Oversight Board], or SEC [Securities and Exchange Commission] standards, then you’re looking at an increasing number of companies not only being delisted but eventually becoming ‘uninvestable’ for U.S. investors more broadly,” he said.

Write to editors@barrons.com