Despite the recent surge in the Chinese stock market, the official data released by the Chinese Communist Party and Caixin on the same day in September showed a significant contraction in demand according to the Purchasing Managers’ Index (PMI) for the manufacturing sector. Experts analyzed that China’s economic contraction is evident in five aspects, and the sharp rise in the stock market is not normal, simply an artificially induced bull market. If the authorities do not effectively reverse the economic slowdown, address the structural issues in China’s economy, future problems may become even more severe.
On Monday, both the official PMI and Caixin PMI for the manufacturing sector in September were released. The official PMI was 49.8%, staying below the boom-bust line for the fifth consecutive month. Caixin PMI was even lower at 49.3%, marking the lowest since August 2023. Both PMI indices indicate a noticeable contraction in demand. A PMI below 50% implies that the manufacturing sector is contracting.
“This proves that the downward pressure on China’s economy has not changed,” noted David Huang, an economic expert based in the United States, in an analysis for Da Ji Yuan. “The overall economic activity contraction remains very apparent. Economic contraction is essentially a contraction in demand, indicating inactivity in economic activities.”
“The main reasons are as follows. Firstly, China has witnessed a shift from private to state-owned enterprises in the past decade, with numerous state-owned enterprises seizing the market from private enterprises, resulting in crackdowns and reorganizations within the private sector.”
However, Huang pointed out, “Comparatively, state-owned enterprises are bloated, with lower operational efficiency, and the output compared to investment is unreasonable. This leads to a market downturn, indicating that the downward pressure on the economy remains unchanged.”
Secondly, Huang mentioned, “China’s primary source of economic development currently relies heavily on exports rather than a balanced growth model. After 2000, China’s economic takeoff was primarily attributed to its entry into the WTO, allowing for massive exports to Europe and North America.”
Nevertheless, in recent years, with the escalating tensions in Sino-American trade relations and with Europe, China’s share of exports to Europe and North America has steadily declined. According to Reuters, new overseas orders in China’s manufacturing industry are declining at the fastest pace since August last year. September’s new orders saw a significant drop from the previous month, with the New Orders Subindex hitting a two-year low.
Huang analyzed that current export growth mainly relies on Asia, Africa, and Russia. However, the profitability in these markets is generally low, failing to spur economic growth.
He added, “Thirdly, there is a noticeable withdrawal of foreign capital, especially this year.” Foreign investment into China brings more than just funds; it also includes significant orders, advanced technology, and comprehensive management experience. Hence, the withdrawal of foreign capital poses a significant impact on China’s economy.
Public data indicates that following a record high of $344 billion in foreign investment in 2021, there has been a substantial decline in recent years. Bloomberg reported that in the second quarter of this year, the scale of foreign investors withdrawing funds from China reached a record high.
Furthermore, Huang mentioned that the fourth aspect is the substantial increase in the youth unemployment rate. “Because China’s state-owned enterprises continue to encroach upon the private enterprise market, and since over 70% of employment in China relies on private enterprises, the closeness and nepotism within state-owned enterprises lead to a closed bureaucratic system that is not conducive to societal openness. Consequently, the contraction of private enterprises has resulted in substantial youth unemployment, leading to the waste of their labor and productivity, making it economically irrational in terms of resource allocation.”
He also highlighted an important reason for the economic downturn, “Due to China’s foreign aid, some projects under the ‘Belt and Road Initiative’ as well as large-scale domestic infrastructure projects, too much national power and financial resources have been wasted on foreign aid, imposing a heavy burden on China’s economic activities. These expenditures are borne by taxpayers or transferred to the entire market and market participants, leading to the economic downturn. The overall funds and renewable resources in the economy have been depleted.”
Huang indicated that overall, the decline in PMI is linked to the aforementioned structural issues. While there are some short-term stimulus policies implemented, such as loosening bank lending, in a market with limited profit margins and limited business opportunities for some enterprises, pouring funds continuously into the market would result in the funds being unable to find suitable investment destinations. This leads to a scenario where a large amount of capital remains stagnant in banks and deposits, failing to play its intended role. This phenomenon is referred to as a liquidity trap in economics.
Against the backdrop of China’s persistently weak economy, recently, the Chinese Communist Party has introduced a series of heavyweight measures to stimulate the economy, including interest rate cuts, reserve requirement ratio reductions, and lowering mortgage rates, leading to several consecutive days of gains in A-share stocks. On Monday, the Shanghai Composite Index surged by 8% to break through the 3300-point mark, while the Shenzhen Component Index also skyrocketed by 10.67%, and the ChiNext Index saw an unprecedented surge of 15.36%.
David Huang believes that this development is definitely abnormal. “Normally, a country’s stock market serves as an indicator of the economy’s future outlook. Yet, considering the current situation in China’s economy, from both the existing conditions and the short to medium-term future, we do not see any possibility of improvement. There have been no significant structural reforms or any sign of change.”
Huang analyzed, stating that the surge in the stock market is essentially an artificially induced bull market, detached from economic realities. Stock markets should provide funding for businesses, yet in China’s case, as the stock market rallies, the actual controllers behind the scenes siphon off the funds without channeling them into the real economy.
He pointed out, “Over a decade ago, the Chinese Communist Party aimed to alter global norms and sought to dominate the world through financial control, mirroring Wall Street’s domination by the United States. They perceived the ability to monopolize over 60% to 70% of the global capital market through a massive securitization and financialization as a means. Established interest groups believed that making money through the stock market was faster than selling products or engaging in agricultural markets—earning decades’ worth of profits within a month. Hence, the Chinese stock market is a very peculiar capital slaughterhouse.”
He further expressed, “Currently, China’s economy is essentially a facade, with a huge allocation towards the virtual economy while neglecting investments in the real economy. In addition, they are heavily focused on the stock market. This delay in addressing the actual issues merely prolongs the inevitable, as an initially sluggish stock market that suddenly becomes exuberant is bound to harm its central nervous system, indicating the potential for a graver situation in the future.”
Sun Guoxiang, an associate professor in the Department of International Affairs and Business at Nanhua University in Taiwan, also stated that the surging Chinese stock market diverges from the fundamentals of the economy, reflecting more speculative activities rather than optimistic expectations of an economic recovery. This situation highlights the instability of the Chinese financial market, where stock market fluctuations are influenced by policies rather than genuine economic growth.
Regarding the loose monetary policies implemented by the Chinese government, such as interest rate cuts and the relaxation of lending policies, Sun believes that they may provide short-term liquidity support to the market. However, due to insufficient domestic demand and low consumer confidence, the effectiveness of these measures is limited.
“For heavily indebted enterprises and individuals, relaxing lending policies may not necessarily kindle actual consumption and investment enthusiasm. The long-term effects are questionable.”
Looking at the long term perspective, these measures fail to address the structural issues in China’s economy, such as lagging supply-side reforms, a real estate market bubble, and soaring corporate debts. Without profound structural reforms, these economic stimuli cannot sustainably yield effects, potentially aggravating financial market risks or triggering even bigger economic crises.
Moreover, Huang also noted that the current stimulus measures are akin to administering a strong dose of medication in the short run, essentially reshaping market confidence. However, in the medium to long term, the government should adopt a series of tax reductions and enhance social welfare after assessing the existing effects, encouraging the growth of private enterprises, as only when the common people have disposable income can they contribute to consumption.
“Furthermore, improving relations with the United States and Europe, breaking the current stalemate in international trade, is crucial. Since China’s exports are the real engine driving its economy, it is imperative for future hopes that improvement in international trade relations occurs.”
Lastly, Huang emphasized, “Increasing the overall efficiency of social management, enhancing the efficiency of bureaucratic and administrative organizations, and reducing excessive government and party interventions in the market are essential. From a purely economic perspective, there seems to be a way out. However, these strategies often conflict with Beijing’s current mindset or its political and national security needs. Therefore, whether there is a way out for China’s economy depends on whether the ruling class is willing to relinquish some political power.”
Sun also expressed that the real bottleneck in the economy lies in the lack of effective demand, not the inadequacy of the money supply. To find a way out for the Chinese economy, structural reforms are imperative, including promoting consumer upgrades, driving technological innovation, addressing overcapacity issues, and reducing excessive reliance on real estate and infrastructure investments.
“The focus of reform should lie in raising people’s income, expanding domestic demand, and improving the social security system. By strengthening the social safety net, lowering medical and educational costs, and providing greater assurances to the public, internal consumption may be stimulated. Only by enhancing people’s living standards and purchasing power fundamentally can sustained economic growth be promoted,” he concluded.