China’s economic struggles deepen, piling pressure on Beijing to act
Macro Insights
QuantCube’s latest insights into China’s economic outlook
China, the world's second-largest economy, is contending with deepening deflationary pressures stemming from a severe property market slump and a decline in consumer confidence. In response, the government has rolled out its most substantial monetary stimulus since the pandemic, including broad-based interest rate cuts and a significant 1 trillion yuan (approx. $140 billion) liquidity injection into the financial system. However, recent economic indicators have continued to underperform, amplifying concerns that China may struggle to meet its growth targets this year. Economists warn this could mark the start of a more protracted structural slowdown, with potential long-term implications for the global economy.
Following a brief uptick earlier this summer, the QuantCube GDP Nowcast now shows a downward shift, as shown in Exhibit 1. In the weeks since the latest stimulus measures, the indicator suggests that while the slowdown has temporarily leveled off, momentum remains insufficient for a meaningful rebound. This plateau highlights persistent challenges, with growth indicators still trailing expectations despite recent interventions.
China’s economic stagnation is largely driven by a persistently weak property market, which has dampened domestic consumption. Until recently, steady manufacturing and industrial output helped cushion these challenges, preventing a sharper GDP decline. However, new data suggests this balance may be shifting, as the manufacturing sector appears less able to offset broader economic weaknesses. This trend heightens concerns over the sustainability of China's growth path and underscores an urgent need for further fiscal policy interventions to address structural vulnerabilities.
China's Manufacturing Sector Shows a Sign of Decline
Our satellite-based industrial activity indicator, which monitors NO₂ concentration levels across key Chinese manufacturing regions, shows emissions remain lower than during the same period in the past two years (Exhibit 2). Given the strong correlation between NO₂ emissions and industrial output, this indicates that production in China’s primary industrial hubs is operating below full capacity, despite a slight uptick we observed in recent weeks.
China's Growth Strategy Shifts: Exporting Surplus to Offset Domestic Slowdown
Another significant challenge facing the Chinese economy is severe overcapacity, with production levels exceeding demand. This imbalance, exacerbated by weakening domestic consumption, highlights a widening gap between supply and demand. As industrial output continues to outpace consumer demand, the risk of inefficiencies and declining profitability rises, putting further pressure on policy makers to address structural imbalances and stimulate domestic consumption. Exhibit 3 illustrates the downward trajectory of the QuantCube Consumption Nowcast, indicating a sustained weakening in consumer demand.
This imbalance is also highlighted in the QuantCube Container Trade Nowcast (Exhibit 4), which shows an increasing gap between imports and exports of containers. To sustain growth amid weak domestic demand, China has leaned more heavily on exports, particularly in sectors like semiconductors and automobiles, to absorb surplus production. However, with industries now offloading excess output abroad at discounted prices, deflationary pressures are spreading into global markets. While this export-driven strategy may provide short-term relief, it underscores deeper structural challenges within China's economy, raising concerns about the efficacy of current policy measures in fostering balanced growth.
China's Economic Challenges Fuel Demand for Gold
China's increasingly challenging economic outlook and limited investment options are pushing investors towards gold as a safe-haven asset. The recent surge in gold prices has been influenced not only by China’s demand but also by U.S. interest rate cuts, escalating geopolitical tensions, and heightened buying from investors seeking stability amid uncertainty. Exhibit 5 illustrates this shift, with QuantCube's Employment Nowcast showing a marked increase in the materials sector, notably driven by Shandong Gold Mining, a state-owned enterprise, reflecting a rising interest in gold-related industries. Earlier this year, China's gold demand was instrumental in pushing prices upward, and as economic pressures persist, this trend is likely to continue shaping global market dynamics.
At QuantCube, we are closely monitoring these developments through our advanced alternative data analytics, providing insights into the evolving economic landscape and its impacts across markets.
