Chinas most recent GDP numbers show that the economy grew 3.9 per cent year on year, which
beat analyst expectations, but fell well short of China’s full-year target of 5.5 per cent,
which is already the lowest target they’ve set in thirty years.
China’s real estate collapse combined with the strict zero-Covid policies have severely
reduced consumer activity in the country.
In dollar terms, spending on imports is up 0.3 percent from a year ago, but if we take
foreign exchange and rising prices into account, China’s real import demand is down about
8 per cent since the lockdowns began.
China’s exports however continue to rise, providing foreign consumers and businesses
with the goods they need.
The real estate slowdown in China has been quite severe.
Looking at the first nine months of this year, property sales in China are down 22 per cent
and new constructions starts are down 38 per cent, while property investment has fallen
8 per cent.
Policymakers in China have loosened key policy rates and taken measures to ensure the completion
of construction projects, many of which have been stalled due to the financial stress Chinese
property developers have been under.
One of the global benefits of Chinas slowdown this year, or at least the timing of that
slowdown has been reduced Chinese demand for things like metals, energy, food and capital
goods which is cutting into the inflationary pressures in the rest of the world at a time
when inflation has become quite a problem.
Inflation has been more subdued in large Asian economies like China and Japan over the last
year than in the rest of the world.
Of course, there is severe inflation in places like Sri Lanka and Pakistan, and there are
inflationary pressures in other Asian economies too.
Pre pandemic, China was a huge consumer of commodities.
China consumed around two-thirds of the world’s iron ore and coking coal – which are necessary
for steel making.
China consumed around 43 per cent of the worlds copper – which is an important metal used
in manufacturing and construction – things like wiring and pipes for example.
Lower demand from China (of course) means lower prices, so Iron ore has fallen to its
lowest level in more than two years due to lower global steel demand.
The economy reducing its demand the most being China.
Copper prices have been in decline this year too, and this is despite the huge amount of
copper that should be needed for the clean energy investments in solar, wind, and grid
upgrades that have been announced in the US and Europe.
It's not just metals or construction materials either, Chinas slower growth has reduced the
demand within the country for energy too.
Electricity consumption, which had been growing at a rate of around 7 per cent per year prior
to the pandemic, is now growing at just 2 per cent.
Consumer spending in China is now more than 10 per cent below the pre-pandemic trend.
Smartphone shipment is often seen as a bellwether of China’s consumer spending.
Between January and August this year there has been a 23% decline in Chinese smartphone
sales year-over-year.
So, people in China are tightening their belts and spending less on all sorts of goods.
Though people may not notice it, this lower demand from China has offset a lot of the
strain on global energy supplies since Russia’s invasion of Ukraine.
So, for the first time in decades, Chinas huge trade surplus is actually helping workers
outside of China, by helping to combat inflation.
Historically, the imbalance between China’s massive exports and small imports hurt the
global economy, as it meant that workers in other countries struggled to earn a living
as they had to compete with cheap imported goods, and couldn’t earn a living selling
goods and services to Chinese customers, who were just not spending.
Now that inflation is a much bigger concern than underemployment around the world, China’s
reduced consumption, combined with their ongoing production of goods that are needed worldwide,
is helping out the global economy and reducing the pressure of inflation in most countries.
Now, (of course) a slowdown in Chinese imports, while helping to reduce global inflation will
not be great for businesses or countries that generate income exporting to China.
The Australian economy – for example - is very reliant on China.
Fifteen years ago, only fourteen percent of Australian exports went to China.
By 2021, 42% of Australian exports were going to China, and that was after China had introduced
tariffs on a variety of Australian imports due to political tensions between the two
countries.
This year, China’s is only buying 29.5 per cent of Australian exports, which is the lowest
level in seven years.
Some of this is due to the trade tensions between the two countries, and some of it
is due to the fall in the price of iron ore – which is Australia’s biggest export,
but it is mostly due to the construction slowdown in China.
They are simply buying and using less of the raw materials produced in Australia.
Now, the Chinese sanctions on Australia possibly even benefited Australia, as it forced Australian
companies to focus on other markets before the Chinese slowdown began.
China was also unable to wean itself off of Australian iron ore, despite its desire to
do so.
The fact that China is still such a big buyer of Australian goods, does mean that Australia
is still vulnerable to any further slowdown.
Now, Xi Jinping’s goal is to make China a mid-level developed country over the next
ten years.
Achieving this would require the Chinese economy to grow at a rate of around 5 per cent per
year.
That would have to be real economic growth and not growth driven by malinvestment.
According to Ruchir Sharma at Rockefeller Capital Management, the underlying trends
of bad demographics, heavy debt and declining productivity growth — suggest the country’s
overall growth potential is around half of that rate.
Sharma points out that achieving that potential of 2.5% growth over the next decade – which
is well below what many people expect – could still be quite a struggle.
If China did achieve that level of growth, it would be the first large middle-income
country to sustain 2.5 per cent GDP growth despite a decline in the working-age population,
which began in 2015.
It would be difficult for China to just throw more capital at the problem.
Total debt in China has reached 275 per cent of GDP, and a lot of that debt funded wasteful
investment in the property bubble.
Sharma points out that China now has to invest $8 to generate $1 of GDP growth, which is
twice the level needed a decade ago, and the worst of any major economy.
The final source of potential growth is productivity.
Countries can offset a shrinking working age population through large improvements in labor
productivity.
With a more productive workforce, companies can afford to pay fewer workers more money
and still remain profitable, and that higher pay then translates into higher domestic consumption
per worker.
Chinas productivity growth averaged 15.5% from 1995 through to 2013, when its working-age
population reached its peak.
Productivity growth then slowed to an average of just 5.7% in recent years.
So, China’s productivity growth rate is decelerating just when it needs it to speed
up.
Productivity isn’t about how hard workers work, it is about how much output is generated
per labor hour, so it is more driven by investment in capital, technological progress, better
management practices and human capital development.
A lot of the easy gains in worker productivity have already happened in China.
China managed to industrialize at a speed never seen before.
I have pointed out before on this channel that China poured more concrete in three years
than the United States poured in the entire 20th century.
Britain industrialized over 7 generations and China in one.
The future growth for China will be a lot more difficult than the growth they achieved
in the 1990’s when almost any project invested in China provided good returns.
The current administration in China also seems much less focused on business and the economy
than some of the leaders in the recent past.
For now, China’s economic difficulties have an upside for the rest of the world, at least
in the short term.
Chinas lower demand for commodities and energy are reducing inflationary pressures in the
rest of the world.
If you find this video interesting you might enjoy my recent video where I looked at how
Japan managed to grow so quickly after the second world war, and how malinvestment, rising
debt and an ageing workforce led to the lost decades the country has since experienced.
Have a great day, and talk to you again soon, bye.