Global alarm bells are ringing due to China’s sharp slowdown in recent months, which was expected to drive a third of this year’s global economic growth.
Government officials are preparing for damage to their economy as China’s imports of everything from electronics to building materials decline. Chinese demand for construction-site equipment is worse than previously believed, according to Caterpillar Inc. President of the United States Joe Biden described the economic issues as a “ticking time bomb.”
Over $10 billion has already been withheld by foreign investors from China’s stock markets, with blue chip stocks accounting for most of the sales. Morgan Stanley and Goldman Sachs Group Inc. have lowered their price predictions for Chinese stocks, with the former issuing a spillover risk warning.
The economies of Asia and Africa are currently suffering the most from a decline in trade. After China reduced its purchases of chips and autos, Japan announced its first decline in exports in more than two years in July. Last week, central bankers from South Korea and Thailand revised their growth projections downward due to China’s sluggish recovery.
However, all is not gloom and doom. Oil prices will decline due to China’s downturn, and the country is experiencing deflation, which lowers the cost of commodities that are exported globally. That’s advantageous for nations like the US and UK, who struggle with high inflation.
Some developing nations, such as India, see opportunities and want to draw in any potential outflow of foreign capital from China.
But given that China has the second-largest economy in the world, a protracted downturn there will harm rather than benefit the rest of the globe. The International Monetary Fund calculated that when China’s growth rate increases by one percentage point, the world economy expands by around 0.3 percentage points.
According to Peter Berezin, chief global strategist at BCA Research Inc., China’s deflation “isn’t such a bad thing” for the worldwide economy. However, if the rest of the globe, including the US and Europe, enters a recession while China’s economy stays weak, it would be problematic for China and the entire global economy.
Look at how the slowdown in China is affecting other countries’ economies and financial markets:
Market Slump
China is the largest export market for many nations, particularly Asia, for everything from food and metals to electronics and energy.
As demand declines from the all-time highs reached during the pandemic, the value of imports from China has decreased for nine of the past ten months. In July, the value of shipments from North America, Asia, and Africa was all lower than it was a year earlier.
The value of imports decreased by more than 14% in the first seven months of this year, with the worst affected regions being Africa and Asia. The value of goods exported to China is negatively impacted by dropping commodity costs, such as the price of fossil fuels, in addition to a decline in demand for electronics components from South Korea and Taiwan.
The amount of goods—like iron or copper ore—sent to China has been steady so far. However, if the downturn persists, exports may be hampered, impacting miners in Australia, South America, and other countries.
Deflationary Pressure
For the previous ten months, producer prices in China have decreased, which means that the cost of commodities exported from the nation is decreasing. That’s good news for everyone who’s still dealing with rising inflation around the world.
Every month this year, the cost of Chinese imports at US docks has decreased, and this trend is likely to continue until manufacturing prices in China resume their upward trend. According to Wells Fargo & Co. economists, the baseline forecast for US consumer inflation in 2025 would be reduced by 0.7 percentage points to 1.4% in the event of a “hard landing” in China, which they define as a 12.5% departure from its trend growth.
Rebounding Slow Tourism
Chinese consumers spend more on travel and tourism than commodities, but they still need to travel abroad in great numbers. Since aircraft are still scarce, and the government previously outlawed group excursions to many locations, travel is significantly more expensive than before the pandemic.
In China, the pandemic and sluggish economy have reduced salaries, and the prolonged housing market decline has made homeowners feel less fortunate than they did previously. That means it would take some time for international travel to recover to its pre-pandemic levels, hurting Southeast Asian countries like Thailand that rely heavily on tourism.
Effect of Currency
The yuan has fallen more than 5% versus the dollar this year due to China’s economic problems, and this month, it is on the verge of crossing the 7.3 level. In addition to its daily currency fixings, the central bank has intensified its defense of the yuan.
According to Bloomberg data, the offshore yuan’s devaluation substantially influences its peers in Asia, Latin America, and Central and Eastern Europe due to a rising connection between the Chinese and several other currencies.
As correlations increase, the weak mood spillover may impact currencies like the Singapore dollar, Thai baht, and Mexican peso.
According to Magdalena Polan, head of emerging market macro research at PGIM Ltd, we’re more concerned about the metal-exposed currencies. “With the weaker China economy, it’s challenging to be optimistic on the Asian economies and currencies,” she added. She warned that the currency of commodity-driven economies, such as the Chilean peso and South African rand, may suffer from weakness in the construction sector.
The worst performer in the Group of 10 basket this quarter has been the Australian dollar, which sometimes trades as a stand-in for the currency of China.
Bonds Fail to Refute
Due to China’s interest rate reductions this year, fewer international investors are interested in its bonds since they have decreased their market exposure and are searching for alternatives in the rest of the region.
According to calculations by Bloomberg, outside holdings of Chinese sovereign notes are at their lowest percentage of the overall market since 2019. The local currency bonds of South Korea and Indonesia have gained increasing support from international funds as their central banks approached the end of their cycles of interest rate increases.
Luxurious Stocks
From Nike Inc. to Caterpillar, businesses have complained that the slowdown in China has hurt their earnings. This month, an MSCI index that monitors international companies with the most exposure to China has fallen 9.3%, almost twice as much as the global stock index.
A measure of European luxury goods, tourism, and leisure from Thailand also tracks losses to the benchmark for onshore Chinese equities. The sectors are “accurate reflections of how global investors may take indirect exposure to China and the outlook as China’s economy continues to weigh,” according to Redmond Wong, a market strategist at Saxo Capital Markets in Hong Kong.
Luxury goods manufacturers like LVMH, which makes Louis Vuitton bags, Kering SA, which owns Gucci, and Hermes International are particularly susceptible to fluctuations in Chinese demand.
