The Chinese economy is in shambles.
While this is unlikely to affect Chinese Communist Party leader Xi Jinping’s bid for another term as regime leader, the world’s second-largest economy will impact the rest of the world if it collapses and burns.
China’s real estate sector, whose importance in the country’s economic rise over the past two decades cannot be underestimated, is broken. Many property developers defaulted. And consumers are pushing back, refusing to pay their mortgages on unfinished homes and even staging protests in dozens of cities across the country.
Meanwhile, domestic growth is plummeting as the country continues to implement CCP virus-related lockdowns. As August ends, lockdowns continue to impact Hebei province, which is just outside Beijing, and mass testing continues in Tianjin. While China has been able to manage its economic output despite the lockdowns – using closed-loop systems – its domestic economy and levels of consumer spending have been hit.
Unemployment rates are also worrying. The unemployment rate among China’s urban youth has reached a staggering 20%, while more new graduates are expected to enter the job market this fall. Chinese tech companies have traditionally been a source of jobs, but last year’s state crackdown on technology left many companies without capital to expand their workforces.
On the other side of the ledger, China owes about $1 trillion in unpaid loans given to Third World countries under the Belt and Road Initiative. Beijing is rebuffed by these countries and may be forced to forgo some loans.
China’s economic woes will impact American and Western multinationals, especially companies with a large retail presence in China. An example is Starbucks, which has thousands of outlets in China and commands over a third of the market share in the world’s most populous country. Starbucks announced a 40% drop in sales in China in the second quarter.
Another negatively impacted company is Nike. The footwear and apparel maker has a major retail presence in China, and its second-quarter non-GAAP earnings (as measured by EBITDA) fell 55%. Both companies blamed COVID-related lockdowns for their declining sales and profits.
Other retail giants, including Adidas and luxury companies such as Richemont and Burberry, also reported lower sales in China.
Products under pressure
Global commodities are facing the twin pressures of a strong US dollar – the currency in which most commodities are priced – and weakening demand from China. Over the past decade, China has been one of the world’s leading importers of raw materials such as iron ore, copper, oil and liquid natural gas.
Chinese iron ore imports in July rose 3.1%, although in the first seven months of 2022 total imports were down 3.4% from a year ago. Chinese imports of liquefied natural gas (LNG) fell 15.4% in July and 20.3% year-to-date to July. The drop in demand for LNG from China did not impact the LNG market, as demand from Europe – cut off from Russian gas – kept the price of LNG very high.
While China continues to import crude oil from Russia while most other Western countries have sanctioned Russia, the overall level of oil imports from China has declined due to the domestic economic downturn. WTI crude closed August down for the third consecutive month, the longest such decline in two years.
Earnings in dollars
The US Federal Reserve announced a “higher for longer” interest rate policy at its annual retreat in August to fight inflation. Fed Chairman Jerome Powell has pledged to do everything in his power to contain inflation, warning it could cause “pain” for investors.
China and the United States diverge in their respective monetary policy. In August, the People’s Bank of China cut benchmark one-year rates by 5 basis points and the benchmark five-year lending rate by 15 basis points to boost credit demand and support its struggling property market. . These cuts came as a surprise, on the back of worse-than-expected July consumer spending and borrowing numbers.
The Fed’s continued hawkish tone should strengthen the US dollar against other currencies. As for the Chinese central bank, it now has less leeway to lower domestic interest rates.
In late August, China’s state-owned banks were selling the dollar in an effort to support its currency, the yuan, according to several forex traders who spoke to Bloomberg anonymously.
In the meantime, expect the dollar to continue rising against the yuan.
The opinions expressed in this article are the opinions of the author and do not necessarily reflect the opinions of The Epoch Times.