China is stumbling through 2024, and the numbers show it. Consumer inflation in November fell to a measly 0.2% year-on-year, the lowest in five months. Expectations weren’t high, with analysts predicting a 0.5% rise, but even that was missed.
Core inflation, which leaves out volatile food and fuel prices, barely moved, ticking up to 0.3% from October’s 0.2%. Meanwhile, pork prices surged 13.7%, and fresh vegetables jumped 10%, further straining household budgets.
Wholesale inflation was no better. The producer price index dropped for the 26th straight month, falling 2.5% year-on-year. This decline, slightly better than the 2.8% drop analysts expected, still signals trouble.
Prices for ferrous metals plunged 7.1%, fuel and power dropped 6.5%, and chemical raw materials fell 5%. Across the board, key industries are feeling the squeeze.
Stimulus efforts aren’t working
China’s economy may meet its growth target of “around 5%,” but that’s where the good news ends. A prolonged housing slump, weak domestic spending, and worsening trade tensions with the U.S. are dragging everything else down.
Since late September, Beijing has been throwing everything it can at the problem: cutting interest rates, easing property buying rules, and pumping liquidity into stock markets.
The results? Minimal. Consumer price inflation remains stuck near zero, while producer price deflation deepens. The roots of these issues trace back to the country’s struggling real estate sector, which props up local government finances.
Beijing announced a $1.4 trillion bailout in November to ease the debt crisis choking local administrations, but it’s like putting a Band-Aid on a bullet wound.
Economists at Morgan Stanley warn the debt swap program needs to expand further. Local government financing vehicle (LGFV) debt is almost half of China’s GDP, and the current measures won’t be enough.
On top of this, Beijing plans to widen its fiscal deficit by 1.4 percentage points to fund central government borrowing. By October, the fiscal deficit had already surged to 3.8%, driven by special bond issuance. Yet, by March, policymakers scaled back to a 3% target.
China’s leaders are banking on “more proactive” fiscal policies and “moderately” looser monetary policies to stimulate domestic consumption. At a recent Politburo meeting, they committed to stabilizing property and stock markets while using “unconventional counter-cyclical” measures.
Trump’s return, U.S.-China trade tensions rise
As if internal problems weren’t enough, China is facing another trade showdown with the United States. President Donald Trump has vowed to slap 60% tariffs on Chinese imports, a move that would gut trade between the world’s two largest economies.
Beijing isn’t taking this lightly, recently restricting exports of high-tech and military-use materials. Despite the tensions, Trump claims he’s on speaking terms with Chinese President Xi Jinping. Over the weekend, Trump told NBC’s Meet the Press, “I had an agreement with President Xi, who I got along with very well.”
However, their relationship hasn’t always been smooth. During his first term, Trump escalated the trade war and called COVID-19 the “Chinese Virus,” souring relations further.
Beijing congratulated Trump on his election win, showing a desire for “healthy and sustainable” relations. At the same time, Xi laid down China’s “four red lines” during a recent meeting with President Joe Biden, setting boundaries for any future negotiations with Trump.
Financial markets are already reacting. Hong Kong’s Hang Seng Index jumped 2.8% following Monday’s economic data release. The Chinese offshore yuan strengthened slightly to 7.2776 against the U.S. dollar. However, China’s 10-year bond yields hit a record low of 1.935%.
Housing and debt woes pile up
China’s real estate market remains a disaster. Local governments, heavily reliant on land sales for revenue, are finding themselves in deeper financial trouble as property prices stagnate. The November $1.4 trillion bailout package is supposed to help, but Morgan Stanley analysts say it’s just a start.
LGFV debt is a ticking time bomb, and expanding the debt swap program is important. The real estate crash isn’t just a housing issue, it’s hitting consumer spending hard. With fewer people buying homes, related industries like construction and retail are also taking a hit. Xi Jinping acknowledged these challenges at a recent policy meeting, calling for “full preparation” to meet 2025 economic targets.
Meanwhile, the Central Economic Work Conference, scheduled for December 11-12, will set the stage for next year’s fiscal plans. Leaders are expected to keep the GDP growth target at “around 5%,” the same as this year. But given the current economic climate, even maintaining that modest goal might be a stretch.
Beijing is also facing criticism over its latest tech export restrictions. The move, seen as retaliation against U.S. sanctions, could escalate the tech war between the two nations. With Trump naming China hawks to key administration posts, including ex-Senator David Perdue as U.S. ambassador to China, the road ahead looks rough.
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