News in Charts: What’s going on in China?

In a recent series of client presentations, Fathom Consulting delivered its latest Global Outlook, Spring 2024. This explored several possible scenarios for the future of the global economy, financial markets and geopolitics. These scenarios were summarised here, in a previous edition of News in Charts. As noted, Fathom’s central scenario argues that the worst is over post-COVID. Consumer confidence looks to echo that more optimistic outlook, as shown in the chart below. Although confidence remains lower than usual, it is on the rise across the US, EA and UK. In short, we conclude that things look to be on the up. But there is an exception to that finding — China, which is the subject of this week’s News in Charts.

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Fathom’s suite of proprietary indicators, many of which are available on Chartbook, offer unique insight into China’s economy. They inform our Global Outlook and have led to numerous correct calls in the past, such as “China is not about to drive up global inflation”. At the time, that call was controversial, with many analysts focused on China’s terrible demographic trends and the impact that would have on the available pool of labour in the so-called ‘factory of the world’.

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Instead of focusing on where it was easiest — where the light was shining — Fathom’s analysis was based on a detailed study of the factors driving China’s role in influencing global inflation and it identified vast quantities of underemployed workers in China’s labour market, most notably the construction sector, with around a third of those employed in the industry either producing very little or nothing.

Now that the troubles in China’s housing industry are clear for all to see, the notion that China will not be a source of global inflationary pressure is much less controversial. Indeed, the Chinese New Year up-tick aside, China’s core inflation has been hovering at around 0.5%. Another of Fathom’s proprietary indicators[1]reveals that this weakness is due to an increasingly smaller contribution of residential property prices to core inflation.

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That is despite China no longer adding to its massive oversupply of housing, as shown below. Indeed, the number of housing starts now matches the number of housing completions for the first time in over two decades. By definition, anything started but not completed is either under construction, paused or has been demolished. With the exception of demolitions, this adds to China’s spare housing stock. As a consequence, the amount of excess floor space in China is already large enough to house 274 million people — that’s the entire population of Indonesia.

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Notably, China is eating into that spare capacity, with the amount of floor space sold (the green line) exceeding the amount started. Nevertheless, there is still a profusion of excess capacity that needs to be carefully juggled alongside:

• propping up the economy, which has for a long time been done via investment in the form of housing
• maintaining employment to avoid social unrest, which has contributed to the vast proportions of underemployment aforementioned in this piece
• avoiding a collapse house and land prices, which would weigh on local government coffers since so much of their income is derived from land sales

Past work has identified provinces in the Northeastern regions as facing the toughest juggling act. Interestingly, local governments here look to be up to their old tried-and-tested tricks, holding back supply — as evidenced by falling land sales volumes — in order to support land prices, which are up almost 60% year on year[2]. Overall, this means their local government revenues are largely unaffected, while helping reduce the problem of oversupply in China’s housing sector.

The danger is that one of balls gets dropped, and that ball might just be employment. Unpicking to what extent has become an increasingly difficult task when it comes to China. Tens of thousands of data series have been discontinued over the past decade, or revised without being backdated, for example China’s youth unemployment rate. This reached over 20% before being discontinued last year and replaced with a new, but not backdated series. This new series excludes students, but at 15% is still about three times the overall unemployment rate in China.

This increasing opacity, and its implications for gauging China’s true economic growth rate as measured by our China Momentum Indictor (CMI), was another theme in Fathom’s Global Outlook, Spring 2024. LSEG clients are able to access some of the charts and analysis from this Outlook in the Chartbook. They can also enquire for more information about Fathom’s Global Outlook service here.

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[1] The weights for each of the subcomponents are not made publicly available by China’s National Bureau of Statistics, and consequently nor are the percentage point contributions to China’s headline and core inflation rates.

[2] If this were a demand-driven collapse in land sales, prices would likely have fallen too.

The views expressed in this article are the views of the author, not necessarily those of LSEG.

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