China’s economy has played a pivotal role in driving approximately one-third of global economic growth this year. However, recent months have witnessed a dramatic slowdown in China, which is ringing alarm bells worldwide. The downturn, encompassing imports ranging from construction materials to electronics, is prompting policymakers in various nations to brace for potential economic setbacks. Caterpillar, a prominent machinery manufacturer, indicates a decline in demand for construction-site equipment compared to previous periods.
Global Investors Withdraw Over $10 Billion from Chinese Stock Markets
Global investors have already pulled out more than $10 billion from Chinese stock markets, with a significant portion of the sales affecting blue-chip stocks. Goldman Sachs Group and Morgan Stanley have revised their targets for Chinese equities downwards. Additionally, China’s economic landscape presents even greater challenges, raising concerns among global investors. The economies of African countries and Asian nations are currently grappling with the largest shock from China in terms of trade. Following a reduction in purchases of cars and chips due to decreased demand, Japan has recorded its first decline in exports in over two years in July.
Reduced Costs of Chinese Products to Bring Relief to the United States and Britain
Central bankers from South Korea and Thailand recently highlighted China’s sluggish recovery, suggesting that their growth rate estimates have taken a hit. However, the situation isn’t just bleak; China’s economic downturn is poised to soften global oil prices, consequently leading to a drop in product prices. This, in turn, will result in reduced costs for goods shipped globally. This situation could prove advantageous for countries like the United States and Britain, which are still grappling with the aftermath of high currency depreciation. Emerging markets like India are also searching for opportunities to attract foreign investments, especially from companies seeking alternatives to China. Nonetheless, as the world’s second-largest economy, China’s prolonged slump will impact not only its own economy but also pose a challenge to the global economic scenario.
Recent Months Witness Decline in China’s Import Prices
Several countries, particularly in Asia, heavily rely on China as a primary export market for electronic parts, food, metals, and energy resources. However, China’s import prices have experienced a decline over the last ten months, mainly in the last nine months, as the demand has fallen from the peak levels recorded during the pandemic. Africa, Asia, and North America have all seen a drop in shipments compared to the previous year, with a substantial decrease in imports during July. Africa and Asia have been particularly affected, with import prices plummeting by over 14% in the first seven months of this year. This trend is partially attributed to reduced demand for electronic parts from countries like South Korea and Taiwan, along with falling prices of commodities like fossil fuels, which are impacting the cost of goods shipped from China.
The global economic development has been impacted by about a third due to China’s economy this year. However, in recent months, the growing economic slowdown in China has emerged as a significant threat for the world. The declining imports, ranging from construction materials to electronics, have raised concerns among policymakers in various countries about potential damage to their economies. According to Caterpillar, the demand for machinery used in construction sites has decreased compared to before.
Global investors have already pulled out over $10 billion from Chinese stock markets. Major investment firms like Goldman Sachs and Morgan Stanley have revised their goals for Chinese equities, reflecting increased challenges in China’s economic outlook. This downturn in China’s economy is having a more significant impact on trade with African countries and Asian economies, presenting the biggest setback to trade in emerging markets since the financial crisis. Following a decrease in demand for vehicles and chips after reduced purchases from China, Japan recorded its first drop in exports in over two years in July.
The affordability of Chinese products due to the decrease in manufacturing costs is expected to bring relief to countries like the United States and Britain. This situation will benefit countries struggling with high inflation rates and attract investors looking for alternatives to China. However, despite being the world’s second-largest economy, China’s prolonged economic slowdown is likely to be detrimental rather than helpful to other parts of the world.
An analysis by the International Monetary Fund (IMF) reveals the extent of the impact of China’s economic slowdown. When China’s growth rate increases by 1 percentage point, there’s typically a corresponding 0.3 percentage point increase in global growth. According to Peter Bereskin, Chief Global Strategist at BCA Research, the situation of deflation in China is not as bad for the global economy. However, if other major economies like the US and Europe also experience a downturn while China remains weak, it will pose a problem not just for China but for the entire global economy.
Impact of Iron and Copper Ore Shipment Downturn
The decline in China’s import prices has affected the shipment of goods such as iron and copper ore, which are crucial for various industries. The quantity of shipments of such goods to and from China has decreased in the past 10 months due to reduced demand caused by the pandemic. African and Asian countries have been particularly affected, with import values decreasing by over 14% in the first seven months of this year. The decrease is partly due to reduced demand for electronics parts from South Korea and Taiwan and falling prices of goods like fossil fuels affecting the cost of exported items from China.
Significant Price Increase due to Reduced Flight Numbers for Travel
The decrease in the number of flights has made international travel significantly more expensive. According to economists at Wells Fargo & Company, the “hard landing” in China will impact the US consumer inflation by 1.4% instead of the previously estimated 0.7% by 2025. Chinese consumers spend more on services like travel and tourism compared to material goods, but they still aren’t traveling abroad in large numbers. Government-imposed travel restrictions in several countries and lower flight numbers mean that international travel remains much costlier than before the pandemic.
Effect on People’s Income in China due to Pandemic and Weak Economy
The pandemic and weakened economy have affected people’s incomes in China. As the housing market has seen a downturn for years, homeowners feel less affluent than before. This suggests that the return to pre-pandemic levels of foreign travel could take quite a while, potentially impacting countries heavily reliant on tourism, such as Thailand in Southeast Asia.
Chinese Yuan Weakened by Five Percent Due to Economic Crisis in China
China’s economic crisis has resulted in a decline of more than 5% in the yuan compared to the dollar this year, with the yuan approaching 7.3 to the dollar. The central bank has supported the yuan’s value through daily currency fixing and other measures. Bloomberg’s data indicates that the impact of a weaker yuan is being felt more in Asia, Latin America, and the Central and Eastern European bloc rather than with some other counterparts, as China’s currency relationships deepen with some others. The weakened belief in the pegged yuan could affect currencies like the Singapore dollar, the Thai baht, and the Mexican peso, according to Barclays PLC.
Continued Downturn in China’s Equity Market
China’s equity market continues to experience a downturn. Emerging market macro research from PGIM Limited’s shows a 9.3% decrease this month in the MSI Emerging Markets Index, which is about double the decline in global equities. The Chinese economy’s weakness makes it tough to be optimistic about Asian economies and currencies in a risk-on environment, particularly for base metal currencies. The Australian dollar, which often acts as a proxy for China, has fallen by over 3% this quarter, marking the worst performance among the Group-of-10 basket.
The economic troubles in China have reduced the appeal of its bonds for foreign investors this year. As central banks neared the end of their tightening cycles, the government reduced the appeal of its bonds by cutting interest rates. Bloomberg’s calculations indicate that the overseas holdings of Chinese sovereign notes are the lowest since 2019. Global funds turned more bullish on local currency bonds in South Korea and Indonesia, as central banks were near the end of their tightening cycles.
Anticipated Impact on Companies like Nike and Caterpillar’s Earnings
Companies like Nike and Caterpillar have already indicated that their earnings have been affected by China’s slowdown. These global companies with heavy investment in China are showing signs of earnings being impacted. M