China's Economic Improvement in November

According to a report released by China Beige Book, a reputable independent research firm, there has been some economic improvement among private companies in China during the month of November. This positive development comes after two months of slower growth.

Lingering Doubts over Sustainable Recovery

Despite this improvement, investors remain skeptical about the ability of China's economy to gather enough momentum for a sustainable recovery. This sentiment has had a significant impact on Chinese stocks, with the iShares MSCI China exchange-traded fund experiencing a 9% decrease so far this year.

Rebound in Revenue and Profits

China Beige Book's revenue and profits indexes, which track private companies, have rebounded after two months of decline across various sectors. Notably, the services sector has seen the most significant improvement, with luxury goods witnessing a substantial increase in sales volume growth. This boost in sales can be attributed to events like Singles Day, China's version of Black Friday. Additionally, factory activity has also picked up, primarily driven by an increase in export orders, particularly from Asia in November.

Struggles in the Property Market

Despite Beijing's efforts to revive the market by easing interest rates and attracting home buyers, the beleaguered property market in China continues to struggle. Home builders have experienced a sharp decline in sales growth, while residential real estate agents have witnessed sales dropping to the slowest pace of the year.

Recovery Evaluation

While official Chinese data suggests a promising recovery into the year, Shehzad Qazi, the managing director of China Beige Book, explains that this improvement is primarily due to easier year-ago comparisons when the economy was facing challenges. In contrast, China Beige Book's private data indicates that the recovery likely peaked in the third quarter.

China's Economy Faces Growing Challenges

China's economy is facing growing challenges as the pace of growth begins to taper off. Experts predict an even slower year ahead in 2024, prompting Beijing to take action through fiscal measures. However, recent data suggests that the Chinese economy is stabilizing at low levels rather than experiencing a rebound.

In October, industrial profits grew by a mere 2.7% compared to the previous year, which is significantly slower than the growth recorded in the preceding months. Moreover, profits for industrial firms have shrunk by 7.8% year-to-date through October, indicating that deflationary pressures are likely to hamper profits and have a negative impact on Chinese stocks.

While additional stimulus measures are expected, it remains unclear whether they will be sufficient to jump-start a recovery. Nevertheless, Beijing's ongoing stimulus efforts and easy interest-rate policies are expected to provide some support to the economy.

In contrast to the Western developed world, China continues to maintain low interest rates. This exception can be attributed to factors such as a shrinking population, a substantial debt burden, and decelerating productivity gains. Capital Economics economists suggest that China may be headed towards ultralow interest rates, similar to those that have propelled U.S. markets.

Recent data from China Beige Book reveals that corporate borrowing and bond sales have increased for the second consecutive month in November, coinciding with the decline in interest rates since March 2021.

Despite signs of improvement, it remains uncertain whether these positive developments will be sustained in the long term.