Commentary
China’s economic loss will be the world’s gain.
China’s economic slowdown means the rest of the world will enjoy lower oil prices, lower consumer goods prices, and lower raw material costs. As Chinese stock markets
continue to fall and foreign companies are wary of expanding operations in China, both foreign direct investment (FDI) and equity investments are being redirected to the United States and its allies.
A China slowdown also means that countries will see a decline in their trade with China. However, many of the inputs, raw materials, and components that China normally buys are for the manufacture of products destined for export to the United States and elsewhere. To the extent that demand in those countries persists, new supply chains will develop as manufacturing
shifts to India and other countries. In the meantime, there will be some economic turbulence, but in the end, China’s loss will be the world’s gain.
At the beginning of the COVID-19 lockdowns in 2020, many companies hesitated to redirect their investment or shift manufacturing to other countries. Believing the downturn was temporary, they decided just to wait it out. However, the current problems in China’s economy are not temporary and only seem to be worsening.
According to the State Council—China’s chief governing authority—in the
first half of 2023, the country’s GDP grew 5.5 percent year-on-year. However, during the second quarter, GDP growth
expanded by only 0.8 percent quarter-on-quarter, showing that momentum is waning. Furthermore, the year-on-year figure was compared with 2022, when the country was still under lockdown. The exceptionally low base of comparison distorts the 2023 figure, making it look better than it really is.
China watchers have long predicted the collapse of China’s real estate sector, and it seems that vindication is near. Evergrande Group recently applied for
U.S. bankruptcy protection. Totaling
$31.7 billion, it’s one of the world’s largest debt restructurings. The latest story in the real estate sector is that China’s No. 1 property developer, Country Garden, currently owes
$194 billion and stands on the brink of default. Consequently, the company’s bonds that mature in 2026 are
trading at 8 cents on the dollar. Over the past two years,
40 percent of China’s private home sales have defaulted, and new home sales by China’s largest developers
dropped by 33 percent year-on-year in July.
One of China’s largest trust investment firms, Zhongrong International Trust Co., which has
$82 billion under management, recently defaulted on payments to investors. About 10 percent of the trust sector’s assets are in real estate,
totaling $302 billion, raising fears that a collapse of the real estate sector could take the trust sector with it. As the real estate and financial sectors contract, so do employment and wages. Lower incomes, increased uncertainty, and job losses are suppressing consumption.
Imports in China have been trending steadily downward for the past
10 months, with both costs and factory gate prices falling. Every month this year, the cost of Chinese goods
at U.S. ports has gone down. With both the real estate and financial sectors in decline, China is purchasing fewer raw materials, which is contributing to a
global decline in price. The same is true of energy. China is the world’s largest buyer of both oil and coal. And now,
oil prices are coming down, and coal prices have
declined by 60 percent so far this year.
Beijing has set a 5 percent GDP growth target for this year, but economists are
more pessimistic about the country’s prospects. Ironically, while the economic woes are largely caused by mounting debt and credit expansion, the central bank’s reaction has been to
cut interest rates. An interest rate cut lowers the standards of profitability and viability of investments, encouraging malinvestment in unsustainable projects.
The unnaturally low interest rates of the past decades are the reason China is home to ghost cities and seemingly unnecessary infrastructure projects. In the past, Beijing has used infrastructure investment and soft loans from state banks to spend its way out of recession. But given the current situation, it’s likely that no amount of spending will bring back the foreign factories or increase exports, which are the only ways to repay those loans and sustain meaningful economic growth.
As U.S. and foreign investors shift their new ventures to India, Vietnam, and Indonesia, those countries will experience a welcome boom, which will improve the lives of citizens. This increased economic engagement will strengthen diplomatic ties between the United States and its allies while decreasing the world’s dependence on China. Beijing will continue to build its pariah bloc with countries such as North Korea, Iran, and Afghanistan. Meanwhile, ASEAN, the European Union, Oceania, and South Asia will continue their pivot toward the American sphere.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
