China, the world’s second-biggest economy, is in trouble. Economic growth has slowed considerably in the second quarter of 2022, according to official data. A myriad of factors – decreasing lending rates, lower consumer confidence, turbulent semiconductor politics and a freefalling property market – have all contributed to a perfect economic storm in the world’s most populous country.
Alongside this, the East Asian country has continued to enforce strict quarantine rules and endorse large-scale Covid lockdowns across the nation. Beijing’s zero-Covid policy has been a major player in the slowdown of economic growth, and caused rising tensions and pessimism amongst the population.
In this post, the OCI team examines the current state of the Chinese economy, and explores the implications of weakening Chinese economic performance for the world economy and global supply chains. Read below for a live update on China, and if you’d like to speak with our experts about how we can help – please call us on +44 (0) 203 137 7326 or email us at email@example.com.
Examining the Current State of China’s Economy
Recent statistics and data do not paint an optimistic picture of the Chinese economy. Only a week-and-a-half ago, the People’s Bank of China reduced a key interest rate – cutting the medium-term lending rate by 10 points to 2.75 per cent. This was the first drop since January, and suggests growing anxiety over falling consumer demand. Youth unemployment has reached a record-high of 19.9 per cent, and retail sales and industrial production have risen by much less than anticipated.
Whilst equity markets are rising elsewhere in other key global economies like the US, Chinese stocks have fallen and look to be on a more negative path. Consumer confidence is also falling – as exemplified by lower sales of high-end goods such as luxury watches and bags. At the same time, semiconductor manufacturing has been dramatically hit by widespread geopolitical tensions and a downturn in chip demand.
In another bleak sign, the Chinese property market is in crisis too. A sector, which has at points in its history accounted for a quarter of the nation’s GDP, in trouble is a hugely worrying situation. Mortgage strikes, property sales declining by up to 20-30%, and huge proportions of in-progress developments not being finished are just three troubling aspects of the property market’s immense difficulties.
Amidst all of this, one thing has been constant – China’s insistence on lockdowns. Large cities have repeatedly been put into lockdowns, in an attempt to control the Omicron coronavirus variant and achieve zero-Covid targets. China’s biggest city, Shanghai, has had to contend with a two-month lockdown – wrecking supply chains and forcing factories to stop operations.
Wider Impact on the Global Economy and Supply Chains
As one of the world’s most prominent economic powers, a slowdown in economic growth in China can have far-reaching consequences for the world economy and supply chains. Indeed, fears abound of mass disruption to the worldwide economy and potentially, a global recession. Two countries which have experienced after-effects of China’s sluggish economic performance are Germany and South Korea. Both countries have reported rare trade deficits with China, as a result of declines in imports of manufactured goods. Analysts warn that all countries which are exposed to Chinese domestic demand are vulnerable right now.
However, other analysts are sceptical about the ripple effect of the economic slowdown on international economies, highlighting the fact that less than 5% of Chinese equities and bonds are owned by foreign parties. Foreign exposure to Chinese assets appears to be minimal. One thing that is undeniable though is that global supply chains are becoming increasingly affected by the Chinese slowdown. Today, supply-chain pressures are growing as a result of a worsening production and an impeded flow of goods and services.
To conclude, it is certainly a troublesome time for China. Much remains unclear – both economically and politically, and it will be vital to keep a close eye on what happens next in China, as well as the country’s policy responses in the near-future.
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