IMF likely overestimating China's economic growth prospects: US analyst

China's economic growth this year might be only half of what the International Monetary Fund is predicting, owing to a huge shake-out in the country's property sector, weak foreign direct investment and other structural problems, according to the founder of a U.S.-based think tank that studies China.

While the country is "getting to the bottom of the property cycle" and will be stronger "a year from now", the central government's need to bail out struggling subnational governments and growing constraints on Chinese exports means economic growth could be as low as 2 percent this year, Daniel Rosen of the Rhodium Group said on Wednesday.

The IMF has forecast 5.2 percent growth for China, which it confirmed in July along with an upward revision on both India and the U.S. by 0.2 percentage points, to 6.1 percent and 1.8 percent, respectively.

Rosen said growth above 3 percent was unlikely for China "into the medium term and beyond."

Because the IMF is required to use data provided by Beijing for its projections, "their hands are somewhat tied, and they're not allowed to go off and kind of pick their own and alternative data with which to offer a corrective," he said in a discussion that highlighted updates to Rhodium's China Pathfinder database.

The gauge compares China to 10 developed economies, including the U.S. and Japan, on six benchmarks including market competition and trade openness.

"They need to pass that question to the Chinese authorities who produce that number to please explain what is growing to deliver [5.2 percent growth] because I can't find anything that could possibly explain" more than 2 or 2.5 percent growth for the year, he added.

Beijing's economic challenges stem from losses and bankruptcies among over-leveraged property developers, who had been key in driving decades of national growth.

Last month, Moody's Investors Service revised its outlook for China's property sector from "stable" to "negative" despite the introduction of multiple stimulus measures, including reduced mortgage rates and down payments, to limit the decline.

Chinese exporters navigate the bumpy road back to the international market

Rosen said "the net export side ... was really the bright spot in China's growth, such as it was, in 2023," but added that "2024 is not the year when China has room to solve its problems through exports."

Beijing may already be facing a challenge in leveraging one of the country's most sought-after exports: electric vehicles.

The European Commission officially opened an investigation into China's electric vehicle sector on Wednesday, saying it had evidence that Beijing has provided subsidies that risk damaging EU industry. A statement published in the Official Journal of the European Union said the subsidies "pose an imminent threat of injury to an already vulnerable EU industry."

Amid these mounting challenges, there are concerns that China's economic woes could put a drag on global growth, an issue that Brad Setser, a Council on Foreign Relations senior fellow, addressed on Wednesday.

Speaking on a panel with Rosen and Nargiza Salidjanova, director of Rhodium's China projects team, Setser said the impact of China's slower growth was limited because the country's imports are relatively low as a percentage of total trade and domestic GDP.

"The fact that China is a very modest importer now of manufactured goods is quite relevant when thinking about the direct effects of a slowdown in Chinese growth," he said.

Excluding imports of parts used to make finished products, "China's goods imports are now about 5 percent of its GDP, which is actually at the low end, by a significant degree, relative to the rest of the world economy", he said.

But he added that Beijing's dependence on exports to offset domestic economic weakness did create risk for other countries.

"China may embrace policies that would support further expansion of an already large manufacturing surplus," he said.

"Private money is leaving China. ... So I think you have to think in some broad sense about where the risk lies, and to me the risk almost entirely lies around a disruptive change in China's exchange rate policy that aims to propel Chinese exports forward."

China's property crisis also hitting Southeast Asia, regional body says

Salidjanova said Beijing's regulatory policies, particularly those governing the tech sector, are partly to blame for the weaker capital inflows, in addition to broader concerns about weakening consumer demand.

China's January-July foreign direct investment dropped by 9.8 percent, in U.S.-dollar terms, from a year earlier to U.S.$111.8 billion, according to Beijing's Ministry of Commerce.

That trend tracks with a slight decline in the "modern innovation system" benchmark in Rhodium's Pathfinder gauge. On this measure, China slid to 2.2 out of 10, down from 2.4 in 2021.

Salidjanova cited "a lot of the technical policies that have tightened in the tech sector, for example."

Last year, Beijing announced new security assessment guidelines for cross-border data transfers, adding bureaucratic hurdles and compliance costs for international businesses operating in China.

"And then we look at things like governance over data and data transfer, which [is important] for a lot of innovation, high tech economies," she said.

"Being able to transfer your data between different parts of your company is so important, and this is where a lot of the friction emerges between open market economies, which have one set of regimes and policies governing data transfer, versus what China is doing."

"Until very recently, it was sort of almost received wisdom that China is going to overtake the United States ... in terms of GDP growth," Salidjanova added.

"With the current trend lines, it's not likely to happen." (SCMP)

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