China’s economy is in turmoil.
It is unlikely to affect the next term of Chinese Communist Party leader Xi Jinping, but if the world’s second-largest economy collapses and burns, it will have global implications.
China’s real estate sector has collapsed over the past two decades, whose importance in driving China’s economic growth cannot be underestimated. Many real estate developers are in default. And consumers are resisting, refusing to pay mortgages on unfinished housing units, and protesting in dozens of cities across the country.
Meanwhile, domestic growth has slowed as lockdowns related to the Communist Party of China virus have been enacted again and again. As of the end of August, lockdowns continued to affect Hebei province just outside Beijing, with large-scale tests continuing in Tianjin. was able to manage the economy, but the domestic economy and the level of consumer spending have taken a hit.
I am also worried about the unemployment rate. China’s urban youth unemployment rate has reached a staggering 20%, and more new graduates are expected to find work this fall. Chinese tech companies have traditionally been a source of employment, but last year’s state-led crackdown on technology left many without capital to expand their workforce.
On the other side of the ledger, China owes about $1 trillion worth of outstanding loans given to third world countries as part of the Belt and Road Initiative. Beijing has faced backlash from these countries and could come under pressure to waive some loans.
Weakness in retail
China’s economic woes will affect US and Western multinationals, especially those with large retail operations in China. One example is Starbucks, which has thousands of stores in China and where he maintains more than a third of the market share in the world’s most populous country. Starbucks reported that its sales in China in the second quarter fell 40%.
Another company that has been negatively impacted is Nike. The footwear and apparel maker has a large retail presence in China, and its second-quarter non-GAAP earnings (measured by EBITDA) fell 55%. Both companies blamed the COVID-related lockdowns for the decline in sales and profits.
Other retail giants, including luxury brands such as Adidas, Richemont and Burberry, also reported lower sales in China.
Global commodities face the dual pressure of a strong US dollar (the currency used to price most commodities) and weakening demand from China. Over the past decade, China has been one of her important importers of global commodities such as iron ore, copper, oil and liquid natural gas.
China’s iron ore imports rose 3.1% in July, but total imports in the first seven months of 2022 fell 3.4% compared to last year. China’s liquefied natural gas (LNG) imports fell 15.4% in July and fell 20.3% in the year-to-date period to July. The decline in her LNG demand in China has not affected his LNG market as demand from Europe cut off from Russian gas has kept his LNG prices high.
China continues to import crude oil from Russia, and although most other Western countries have imposed sanctions on Russia, overall levels of China’s oil imports have declined due to a slowing domestic economy. WTI crude fell for the third month in a row in August, the longest drop in two years.
The US Federal Reserve announced a “higher long term” interest rate policy at its annual retreat in August to combat inflation. Fed Chairman Jerome Powell has vowed to do whatever is necessary to keep inflation in check, warning that it could cause “some pain” to investors.
China and the US are divided on their respective monetary policies. In August, the People’s Bank of China cut the 1-year benchmark rate by 5 basis points and the 5-year benchmark lending rate by 15 basis points to stimulate credit demand and support the faltering property market. rice field. These cuts came as a surprise on the back of weaker than expected consumer spending and borrowing in July.
The Fed’s continued hawkish tone should strengthen the US dollar relative to other currencies. As for China’s central bank, it now has less room to cut domestic interest rates.
In late August, China’s state-owned banks were selling dollars to support the yuan, according to several foreign currency traders who spoke to Bloomberg on condition of anonymity.
The dollar is expected to continue to appreciate against the renminbi for the foreseeable future.
Views expressed in this article are those of the author and do not necessarily reflect those of The Epoch Times.