The recent decline in China’s Shanghai Composite Index, plummeting below 2,900 and marking a 15% drop from its April peak, raises concerns about the nation’s structural challenges. This significant 28% performance gap when compared to the MSCI World Index (USD) since April underscores a deeper issue at play.
While psychological explanations for economic conditions are frequently invoked, the assertion that structural explanations carry more weight appears justified. The current consensus in China – weak consumption linked to low confidence, and vice versa – highlights a potentially troublesome feedback loop that a surge in confidence alone may not fully remedy. Analysts argue that a sustained post-Covid recovery in China necessitates a real redistribution of income, focusing on tasks such as easing unemployment pressures and fostering public wealth growth prospects.
Despite calls for boosting consumer sentiment, it becomes evident that a comprehensive positive cycle within the entire economy is imperative. The reluctance of China’s middle class to spend, a phenomenon echoed by millions, underscores the need for a clear post-Covid economic recovery to instill confidence in consumers. The situation in China appears to require not just short-term psychological boosts but a more profound structural transformation for lasting economic resilience.
New day, new low!#China's Shanghai Composite Index dips below 2,900, down almost 15% from its April peak. For comparison, the MSCI World Index (USD) is up 13% since then. 28% performance gap between #China and 'the world.' pic.twitter.com/qOvPISBZfZ
— jeroen blokland (@jsblokland) December 26, 2023
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It has become a powerful consensus here in China that consumption is weak because confidence is low, confidence is low because the economy is sluggish, and the economy is sluggish because consumption is weak.t.co/Qc7Kp8ngPJ via @scmpnews— Michael Pettis (@michaelxpettis) December 26, 2023
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But while we love psychological explanations for economic conditions, I think it is usually structural explanations that matter. A surge in confidence may help in the short term, but only a real redistribution of income will matter in the medium and long terms.— Michael Pettis (@michaelxpettis) December 26, 2023