You have to go back to 1990, before McDonald's (MCD) landed in Beijing, to find slower growth than China posted last year. The memory of the Tiananmen Square massacre in 1989 was fresh in the mind. After embracing Deng Xiaoping's economic reforms, and "socialism with Chinese characteristics," China was about to embark on a two-decade run in which growth frequently ran into double digits.
China has confirmed this week that the national economy advanced 6.6% in 2018. The pace was slowest at year end, at 6.4%. There's plenty of doubt about China's official numbers, which are suspiciously consistent and exactly what the central government predicts. But it's the direction, not the magnitude, that matters.
Investors may have too much confidence in the abilities of Beijing to revitalize the Chinese economy through stimulus. In the past, the central leadership has been perfectly happy to lay cement across China if the economy ran into trouble, providing paychecks and "jobs for the boys." It's now intent on exporting the country's excess construction capacity, hence the Belt and Road infrastructure initiative linking China with the far reaches of Europe.
So, infrastructure spending is harder to execute inside China these days. The cement is already in place. The dams are built. The airports are open. The highways lead ... everywhere.
"Markets have yet to fully recognize the worsening situation, in our opinion," Nomura's Asian economics team write in a report that notes fourth-quarter GDP slowed as expected -- but the "worst is yet to come."
It's likely that Chinese growth will fall below 6% for the first half of 2019, according to the Nomura guys. We'll see what the Politburo sets as its "forecast" for the year when they announce it in March, but I'd bet they'll set and hit 6% for the year.
The reality may be much lower. "Although we believe GDP growth will eventually bottom out, markets currently do not appear to have factored in such a sharp slowdown and may still be putting, in our opinion, too much faith in the efficacy of government support."
There's certainly a lot of pessimism in China about economic prospects right now. Retail sales remain decent. But sales of big-ticket items like cars are slumping.
Most problematic of all is the property market. China has a host of measures in place to prevent rapid price increases, leading to extremely patchy city-by-city performance. Growth is slowing everywhere property prices aren't already falling.
Local authorities are controlling property prices by being stingy with occupation permits. They try to smooth out average prices by releasing mass-market projects at the same time as any high-price sales. The net result is a severe cash-flow problem for some Chinese property developers, a challenge for low-margin, high-volume companies such as Country Garden (CTRYY) .
Only if the national government relaxes the rules on home purchases is sentiment likely to shift much. Nothing says "success" quite like a property purchase in China, except perhaps multiple property purchases. Beijing still has a tight grip on the home-purchase market, and has jumped on the handful of cities that have tried to roll back property restrictions. Local officials have rapidly backtracked after getting a phone call from Command Central.
The trade war is certainly having an effect, too. Any front-loading in anticipation of higher duties is over, and exports to the United States were down in December. Interestingly, imports from the United States are also falling. Despite Donald Trump's best efforts, the trade surplus of US$324 billion -- one-third of US$1 trillion! -- was in 2018 at its highest level ever.
How bad have things got? When surveyed by the American Chamber of Commerce in South China, 64% of U.S. companies said they are considering moving production lines out of China.
The effects are felt at headquarters on both sides of the Pacific. Around 85% of U.S. companies in China said they were already suffering from the higher tariffs imposed by both the United States and China, with 70% of Chinese companies also saying they had been hurt.
Besides the higher duties themselves, companies are also experiencing bureaucratic delays on paperwork, and slower processing times at customs. That's before factoring in the government shutdown. Yet Trump's bid to lure U.S. producers back home is failing. Only 1% of the U.S. companies in China say they intend to establish a manufacturing base in North America.
I'd watch the property market more than the trade war for a real indication of where the Chinese economy is heading next. Growth will struggle, and pessimism will remain pervasive, unless the buying of bricks and mortar begins on a widespread scale again.