The most recent data on population and economic trends in China is astounding; it brings to light the enormous long-term challenges that lie ahead and throws the growth profile of the second-biggest economy in the world back to the isolationist days of the 1970s.

According to some calculations, China’s nominal GDP growth dropped last year to its lowest level since Mao Zedong governed the nation in the mid-1970s, excluding the pandemic shock of 2020.

Additionally, according to official data, China’s population declined for a second year in a row and at a rate that was more than twice as rapid as the loss in 2022—the first since the Great Famine of 1961.

Although it might be argued that the pessimism among international investors over China is exaggerated, the country is experiencing one of the lowest nominal GDP growth rates and the sharpest population fall in decades, which serve as potent counterarguments.

According to Deutsche Bank analysts, the nominal GDP grew by just 4.2% in the previous year. If we exclude 2020, this would be the lowest yearly nominal growth since Mao’s death in 1976.

Of course, in terms of composition, scale, and significance to the world economy, China’s economy has changed significantly since the mid-1970s. But this is a designation.

Nominal growth calculations are a difficult science since they depend on the “deflator” that is employed. Since GDP growth is typically expressed in terms that account for inflation, a nominal estimate needs to have some inflation brought back in.

or a deflation rate to be deducted in the current situation of China.

In contrast, official population statistics reveal that China’s birth rate hit a historic low last year, with the country’s population falling by 2.08 million, or 0.15%, to 1.409 billion.

The more glacial population shift and the nominal growth rate from the previous year are not directly or clearly related. However, a lot of domestic and foreign investors would interpret them both as causes for caution when it comes to China Inc.

Jim Reid of Deutsche Bank questions whether China is creating a “new normal” nominal GDP environment.

He points out that nominal GDP expanded at an average annual rate of 15.5% during the 1980s, 18.5% during the 1990s, 14.5% during the 2000s, and 11.0% during the 2010s. By year’s end, the current decade is expected to have averaged 6.2%.

“A momentous shift for China and the global community,” Reid posted on Wednesday.

Though marginally higher, other estimates of nominal GDP growth show a similar trend. Societe Generale’s economists, for instance, predict that it decreased to 4.6% in the previous year.

Intriguing political optics are also present. Although the U.S. and Japan’s full-year statistics are not yet available, it is likely that China’s nominal growth in the previous year was less than that of its two main economic rivals.

According to estimates from the Organisation for Economic Co-operation and Development (OECD), China’s nominal GDP growth in 2017 was 5.2% compared to 5.3%, which was the lowest it has been for at least 30 years.

Because nominal growth rates do not account for inflation or deflation, they are not as frequently stated. Governments, corporations, economists, and investors use them to set and monitor wage agreements, tax revenues, budgets, debt ratios, earnings, and other important financial variables, therefore they are still important.

In contrast, policymakers find a declining population to be a significant source of consternation when considering growth. This indicates a decline in the number of individuals creating products and services, the number of people requesting those goods and services, and the number of people providing Beijing with the tax income required to maintain an ageing population.

Given this, it should come as no surprise that investors are losing interest in China, taking their money out, and debating whether to go back.

For years, Chinese stocks have underperformed their international counterparts, reaching a five-year low. Consider the last three years: China’s CSI 300 is down 40%, the S&P 500 and Japan’s Nikkei are both up roughly 25%, and the MSCI World is up almost 10%.

It is also understandable why Chinese Premier Li Qiang has been waging a charm offensive throughout the world lately, bringing American financial titans Jamie Dimon, Steve Schwarzman, and others to lunch in Davos in an attempt to persuade everyone that China is open for business.

It might not have been an easy sell even before the politics were taken into account.

According to a Reuters survey of economists, this year’s real GDP growth will be 4.6%, while CPI inflation will be 1.0%. Yet, nominal GDP growth may still contract if deflationary forces continue—producer prices have been declining annually since October 2022.

Despite calling for a 4.4% decline, Barclays economists are below consensus and stated this week that “risks to our below-consensus forecast also remain tilted to the downside.”

(Adapted from Nasdaq.com)

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