China is slipping, which is a problem for us all
China historically has provided up to 40% of the world’s economic growth and this supported commerce for everyone everywhere. Not anymore.
China is New Zealand’s biggest export market taking 28% of our exports, more than double our next largest export market Australia, who takes 12%.
We are tied to China at the hip, economically speaking.
We are doubly vulnerable in New Zealand, both directly as we rely on China to take our exports, and indirectly as our second most important export destination is Australia who in turn rely on China just as much (31% of their exports), if not more than New Zealand does.
None of that is new to us here in New Zealand, but what might be new to some is that China is currently struggling to recover from many crises at the same time.
What is going on in China today:
- The world’s biggest property boom has come to an end - over-investment in empty housing estates mostly by property investors, with the result that huge development companies are struggling to pay their loans or complete their apartments. Have you heard of Country Garden? It was China’s biggest property developer, and it has skipped on two bond payments this month. Evergrande (second biggest) is another failed property developer. The crisis in property development is threatening China’s economy, according to The New York Times (15/08/2023). Investors are jittery as a result.
- Chinese banks are over-extended to the property sector putting them under increasing pressure.
- A prolonged series of lockdowns trying to eliminate Covid-19 stifled manufacturing and business over the past three years and was very expensive to maintain. Instead of picking up after the controls were relaxed with what other countries called a ‘revenge spending spree’, China’s economic engine is sputtering. House prices are falling, people are spending less, consumer and business confidence is falling, deflation is lurking. China’s inflation rate has just fallen by -0.3% for the year to 31 July 2023. Producer prices fell -4.4% for the same period.
- Manufacturing is moving from China to other low-cost countries or back to their countries of origin. e.g., Apple has been shifting its supply chain out of China to India, Vietnam and back to the US.
- There has been a crackdown on foreign companies operating in China since Xi came to power in 2012. There is pressure on foreign companies in China to transfer technology to China, to grant Communist Party representative’s seats on company boards, and for them to dictate hiring and decision-making processes. Several big foreign companies are leaving China. The world is looking to de-couple from China as China poses a political threat, both as a very close friend of Russia and North Korea, as an expansionist aggressor in the South China Sea, and in threatening to invade Taiwan.
- While the world is relying less and less on China as a manufacturing hub, China has tried to anticipate these developments by moving from an export-led economy to one more dependent on domestic consumption, like other western countries. So far it isn’t working. If China could find a way to boost domestic consumption this might be a way to bounce back (Reuters in ‘How much worse can China’s economic downturn get?’ 16/08/2023).
- Many local governments in China, who used to rely for their income on selling land rights to property developers are under huge financial pressure with US $9.5 trillion of debt. This is maxed out and is no longer a source of growth for China.
- The US does not want China to benefit militarily from the use of American technology and so they have banned American investment in some Chinese technology industries that have connections to the Chinese military. The export of sensitive technology to China has also been banned by the US.
- To finish off, in the words of US President Biden, who doesn’t normally comment on economic, or business issues said, …” China’s struggles with high unemployment and an aging workforce make the country a “ticking time bomb” at the heart of the world economy and a potential threat to other nations.” (The New York Times, 11/08/2023).
Japan … on the other hand
On a brighter note, economic growth is bounding along nicely in the world’s third largest economy, Japan, with recent growth of 6% on an annualised basis for the three months to the end of June 2023!
Combine this stellar result with strong activity continuing in the US, and signs that global inflation is peaking, investment markets still look ‘half-full’ to this writer, although expect, as always, for bumps along the way.
Keep asking great questions ...