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The Great (Business) Wall of China is Crumbling

China’s economic slowdown as shown by some digital app

When China eventually removed their zero COVID policies, it was anticipated that the world’s second largest economy would boom. After essentially 2 years of lockdown, domestic consumption was supposed to increase. At the same time, chronic supply chain problems might reverse COVID-related declines in exports. But according to recent economic reports, none of these predictions have become reality. Instead, China’s economic slowdown persists and is actually worsening in many ways. And in order to avoid China’s financial crisis from worsening further, government action may be required. This was certainly not what President Xi Jinping expected for fiscal year 2023.

China’s economic slowdown as shown by a bull statue
China’s economic slowdown is borne of bad decisions and business policies.

(China dropped the ball with COVID and it hurt the world economy–read how in this Bold story.)

When it comes to explaining the factors involved China’s economic slowdown, some are fairly clear cut. Like the rest of the world, China is dealing with rising interest rates and inflationary pressures globally. This has had noted effects on exports. But other factors appear to be negatively affecting the domestic economic situation as well. Confidence within China is low, and both investing and consumer spending are down. Even the real estate market in China is seeing setbacks. It is precisely these developments that make some fear that worse days are ahead for the country. Though China’s financial crisis isn’t yet beyond the point of no return, quarterly figures paint a concerning picture.

“The imports data was pretty bad. On our estimates, pretty much all the recovery in import volumes since the start of the year was unwound in July, which is concerning, to say the least.” – Julian Evans-Pritchard, Head of China Economics at Capital Economics

Ugly Global Trade Figures

Prior to the pandemic, China was set to challenge the U.S. for the number one global trade spot in the years to come. But that has since changed. Not only did China invoke draconian lockdowns and surveillance, but they maintained them for long durations. Coupled with its U.S. trade war and an entrepreneurial exodus, manufacturing, imports, and exports fell dramatically the last two years. This past fall, however, China suddenly reversed course on its zero COVID policies. Early signs of China’s financial crisis encouraged these policy shifts along with China’s economic slowdown. Unfortunately, the effects of these shifts haven’t been very impressive to date.

(China has been driving out entrepreneurs–read how in this Bold story.)

Recent import and export figures released over the past 2 months paint a not-so-pretty picture for China. In June, exports fell by 12.4 % while imports dropped 6.8%. July then showed continued trends in this direction with reductions in imports and exports by 12.4% and 14.5 percent respectively. This now makes three months in a row that China’s economic slowdown has led to declines in both categories. And this has coincided with reduced manufacturing figures consecutively over the past four months. These are the metrics that suggest China’s financial crisis is real and could worsen in the months to come. That is, unless drastic fiscal measures are taken.

A busy street somewhere in China
China is paying the piper for the bad economic songs it’s been playing.

“It is worrisome as far as it shows that demand in China is poor while the rest of the world is awakening, especially the West.” – Alicia Garcia-Herrero, Adjunct Professor at the Hong Kong University of Science and Technology

Domestic Pressures Contributing

As noted, a major part of China’s economic slowdown isn’t coming from global markets. Domestic demand has also been low as consumers have been saving more than spending. There are several reasons for this besides reduced manufacturing and exports. In terms of jobs, unemployment is rising in the country. In fact, youth unemployment is at a record high with another 11.5 million university graduates hitting the market. At the same time, China’s financial crisis regarding its real estate market is noteworthy. The near-collapse of China’s largest real estate developer, Evergrande, has further shaken fiscal confidence. As a result, consumers are choosing to watch the spending, and investors are being very cautious.

A major reflection of this reduced economic demand involves price deflations in the country. Last month, consumer price indices fell by 0.3% in China, highlighting deflationary pressures. Lower demand is the primary driver of these price decreases, which can further drive China’s financial crisis forward. As deflation occurs, China’s ability to pay its debts will be more difficult. And as a result of China’s economic slowdown in the past two years, its debt is significant. Certainly, this is not good news for China, but China’s economic slowdown and deflation could have global impacts as well. Lower cost Chinese goods could place pressure on manufacturers in other countries. Ultimately, this could affect global employment figures and consumer spending as well.

“There is no secret sauce that could be applied to lift inflation. [It might require] a simple mix of more government spending and lower taxes alongside easier monetary policy.” – Daniel Murray of EFG Asset Management

Choices for China Ahead

China’s financial crisis as evidence by falling yuen
China’s financial crisis can be averted… if they reverse their stifling policies and let the free market do its thing.

It’s clear that Chinese officials are aware of the issues plaguing the country. President Xi Jinping set an economic growth target of only 5% this year anticipating China’s economic slowdown to persist. To date, they are still on target for this level of growth. However, should China’s financial crisis worsen, end-of-year stats may fail to realize these targets. Further deflation, worsening trade relations, and rising unemployment are all factors that could hinder economic growth. And with many countries and multinational corporations looking to reduce reliance on Chinese manufacturing, things could worsen further. Thus, both internal and external issues suggest things may get worse before they improve.

In addition to economic growth concerns, China must also address its ability to pay its national debt. Deflation will make this increasingly difficult. And this will likely lead the government to take action to avert China’s financial crisis from worsening. Such actions that will be forthcoming could include increased government spending as well as tax cuts domestically. This could boost consumer and investor confidence while also creating domestic jobs. However, this will not address China’s unfair policies for foreign companies or its worsening trade relations globally. Solutions to prevent China’s financial crisis from getting worse will require more than internal policy shifts. It will require a more favorable international trade approach that in recent times have undermined China’s economic growth.

 

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