China Has Caught a Chill, and the World Is Reaching for Handkerchiefs
How will the slowdown in China's economy affect the rest of the world? Economists are saying it's quite predictable. Prices for oil, gas, and petroleum products could drop. The cost of metals might also decrease. However, before you break out the celebration, remember that the echoes of China's problems will resonate worldwide. They will be heard in Australia, one of the key suppliers of iron ore. They will be felt in France and Italy, where wine, cheese, perfumes, and luxury cosmetics make their way to Chinese boutiques. Developed nations are taking protective measures, but the speed at which China's problems are growing is alarming.
China's economy is hitting a rough patch. GDP growth for the first half of the year was 5.5% in annual terms. In the EU, the USA, and Japan, such growth rates are only dreamt of. However, in Beijing, anything below 6% annual growth is seen as a failure. What's more concerning is that there are clear signs of further economic slowdown. In the third quarter, China's GDP growth could drop to 3.8% in annual terms, according to Morgan Stanley.
Where do the roots of this new Chinese crisis lie? This time, it's primarily a domestic issue. Internal consumption in China is declining, the volume of foreign trade is shrinking, and a serious crisis in the real estate market is looming. Beijing could very well face an economic downturn, not just a slowdown. Naturally, what's happening in China will have a ricochet effect on the global economy and the economies of many nations. Especially on the economies of countries that supply raw materials, fuel, luxury goods, and industrial equipment to China.
Photo: Chinese Premier Li Keqiang and Kristalina Georgieva, Managing Director of the International Monetary Fund, in Beijing, September 1, 2023. "We talked about measures the Chinese government is taking to bring forward the goal of reaching around 5% growth this year. It is important for China; it's important for the world. This is one third of global growth," said Kristalina Georgieva. Source: China Media Group
Gloomy Predictions
Concerns about China have been brewing for at least a year. In the autumn of 2022, the head of the International Monetary Fund (IMF), Kristalina Georgieva, spoke of an impending global recession, with one of the causes being a slowdown in China's economic growth. In August 2023, US President Joe Biden referred to China as a "slow-moving bomb," commenting on the difficulties in the Chinese economy. In his speech, he alluded to the risks stemming from problems in China's economy: "They have got some problems. That's not good because when bad folks have problems, they do bad things."
Photo: U.S. President Joe Biden on August 10th called China a "ticking time bomb" because of economic challenges, including weak growth. "Our Administration is investing in America to bring supply chains back home," Biden said three days later. Source: POTUS Twitter.
International financial institutions, rating agencies, and experts share these concerns.
In July 2023, the IMF updated its forecast for the global economy. According to this forecast, China's GDP will grow by a maximum of 5.2% in 2023, and the growth will slow down to 4.5% in 2024.
The consensus forecast of economists and financiers polled by Bloomberg (including experts from Citigroup and JPMorgan) contains approximately the same figures. They anticipate China's economy to grow by 5.1% in 2023 (down from a previous forecast of 5.2%) and to reach 4.5% in 2024 (down from 4.8%).
KPMG expects China's GDP to grow by 5.5% in 2023 and by 5.2% in 2024. Moody's agency believes that China's GDP will grow by 5% in 2023 and only 4% in 2024.
As we can see, almost all forecasts for 2023 are very close to the target GDP growth rate of around 5% set by China itself. This means the economy is walking a blade edge. And this is after decades of rapid growth. It's worth noting that just a year or two ago, a growth rate below 6% was considered unacceptable by the Communist Party of China's Politburo and a reason for harsh personnel decisions.
The Pandemic Is Over, but the Problems Linger
Many experts were optimistic, believing that China would experience an economic boom after lifting all COVID-19-related restrictions in January 2023. However, no miracle occurred. Domestic consumption remains sluggish, due to reduced incomes and high youth unemployment. Retail sales volume in China increased by 7.3% from January to July 2023. However, in the first half of the year, retail sales growth was 8.2%, and from January to May, it was 9.3%. In other words, retail trade turnovers are rapidly declining. This is the most rapid and precise signal of China's colossal economic problems.
The youth unemployment rate, aged 16 to 24, has been at a record level of around 20-21% for several months. This is while the overall unemployment rate in the country is four times lower. According to professors at Columbia University, millions of Chinese university graduates are struggling to find work but are unwilling to take just any job. This is creating pressure on the labor market and the economy as a whole.
The younger generation prefers to sit in comfortable offices rather than working on the factory floor. According to the Ministry of Human Resources and Social Security of China, by 2025, there will be about 30 million. It's important to note that manufacturing generates over 30% of China's GDP.
Industrial production is in a less than ideal condition; it's slowing down rather rapidly. In July, its year-on-year growth slowed to 3.7%, down from 4.4% in June.
Mortgage Crisis 2.0
One of China's colossal problems is the real estate market slump. Due to worsening prosperity, an increasing number of Chinese people can't afford their mortgages. The level of indebtedness in the housing market in China reaches 70-75%. Add to this the first and second, and you get a rapid accumulation of overdue debt in banks.
Several major Chinese banks have reported that the proportion of non-performing mortgage loans increased from 0.6-8.1% to 3.4-18% in the first half of the year. Goldman Sachs analysts estimate that due to the real estate market crisis, Chinese banks could lose over $260 billion. The government has already acknowledged the situation as close to a catastrophe. No, high-ranking officials didn't say it out loud, and they never will. But their measures to support the real estate market are impressive and reflect the depth of the problem.
The People's Bank of China and the National Financial Regulatory Administration of China have decided to directly support borrowers. Chinese citizens who bought their first home on a mortgage can apply to the bank from September 25 for a reduction in the interest rate on an existing loan or a new loan at a lower interest rate.
This is called pumping the economy with emission money. And it doesn't smell like the market at all. But since the People's Bank of China is under the direct leadership of the Chinese Communist Party, Beijing can afford it.
Overall, China's economic growth over the past 10 years has been driven by this kind of economic stimulus with empty money. For example, the amount of credit obtained by businesses has tripled over the past 10 years and is now one and a half times the country's GDP. Government and household debts, on the other hand, have grown much more slowly.
Photo: Evergrande Group (China) — once the country’s second-largest property developer — filed for bankruptcy in New York on August 17th. The company is now fighting the demolition of dozens of apartment blocks. Source: Al Jazeera video Screenshot.
Xi Jinping throws a lifebuoy
On July 24th, during a meeting of the Politburo, the Chairman of China, Xi Jinping, acknowledged the "new difficulties and challenges" facing China's economy. He pledged to make efforts to boost domestic consumption and stabilize the real estate market.
China's Central Commission for Financial and Economic Affairs estimated that China's share of the global economy exceeds 18%. According to the IMF, China's contribution to global GDP growth will be around 30% in 2023. Therefore, it is logical that the slowdown in the Chinese economy will inevitably affect other countries. According to IMF estimates, a 1 percentage point decline in China's growth rate "slows down" global GDP growth by at least 0.1 percentage point per year.
Let's not forget that China is not only a major buyer of goods but also a supplier. The main items of Chinese exports are electrical equipment, microelectronics, rare earth metals and non-food consumer goods. China imports energy resources, iron ore, and agricultural products.
According to China's General Administration of Customs, in January-July 2023, compared to the previous year, exports decreased by 5%, and imports by 7.6%. Add to this the geopolitical challenges: the trade war with the United States, cooling relations with the European Union, and tensions over Taiwan.
Developed countries remember the shock of disrupted supply chains during the COVID-19 pandemic very well. They have learned valuable lessons from the microchip crisis. However, not enough time has passed for major buyers of Chinese goods, such as the United States, the European Union, South Korea, and Japan, to create alternatives to Chinese factories and plants.
Moreover, Chinese demand has a significant impact on commodity prices: oil, liquefied gas, ores, grains, and vegetable oil.
There are concerns that problems at Chinese enterprises could lead to a shortage of Chinese goods. And a shortage inevitably leads to price increases. Is it all bad? Not entirely. The slowdown in China's economic growth is likely to lead to lower global prices for oil and other raw materials, which means that the prices of products that China sells to other countries may not rise.
Thriller or Melodrama?
A lot hinges on China's choice of strategy to salvage its economy, and of course, Beijing's geopolitical ambitions will influence that decision.
A thriller scenario suggests that Beijing will opt for protectionism and claims of standing up to the G7. In such a case, the Chinese Communist Party would likely push for strict protectionism, promoting local producers and further isolating itself from the external world. This might also involve increasing military spending and aggressively spending foreign reserves. However, this path risks leading China back to the same economic isolation it escaped from in the 1990s. The country's current urban youth, who've become accustomed to global engagement, wouldn't relish such a return.
But it appears that China is leaning more towards a melodrama genre, one that seeks stability. Following a meeting by the Communist Party in late July on the country's economic situation, the government announced intentions to take measures to stabilize foreign trade and boost foreign investments.
Xi Jinping, speaking in early September at the Global Trade in Services Summit, declared China's readiness to cooperate with other countries to lead the global economy "towards sustainable recovery."
U.S. Trade Secretary Gina Raimondo, in a conversation with Chinese Premier Li Keqiang on August 29th, expressed the desire for the United States to maintain economic ties with Beijing in order to "ease tension."
These signals might kickstart a thaw in U.S.-China relations and could lead to new points of agreement both in economics and foreign policy.
Photo: Premier Li Keqiang of the State Council met with U.S. Secretary of Commerce Gina M. Raimondo on August 29th. "Politicizing and overstretching the concept of security on economic and trade issues not only seriously affects bilateral relations and mutual trust but also harms the interests of enterprises and people in both countries," said Li Keqiang. Source: fmprc.gov.cn
In purely economic terms, Beijing is gradually moving towards a less aggressive scenario. On September 1st, major Chinese banks reduced interest rates on several yuan deposits. This is likely aimed at lowering the cost of credit, especially mortgage rates.
Certainly, reducing interest rates could create risks such as yuan devaluation and capital outflows. However, in China's authoritarian political system, measures to counteract these consequences are more feasible.
Indeed, such measures have already begun. On September 1st, the People's Bank of China announced plans to reduce the amount of foreign currency that banks must hold as reserves to alleviate pressure on the yuan.
To boost economic growth, Beijing might also stimulate household consumption. Currently, amid looming crisis fears, average Chinese citizens are becoming thriftier than usual. The government could not only encourage them to spend more but also provide some cash for households to spend.
In the coming months, Chinese leaders will closely watch the outcomes of existing crisis measures. In December, a key party conference is expected to take place, where more decisive actions may be unveiled. These could include lowering personal income taxes, urging businesses to increase salaries, and expanding state pensions and social benefits. These measures, though unprecedented, may be necessary given the unique nature of the current crisis.