China’s quarterly GDP growth (yoy) slowed to the lowest level since the beginning of 2020, when large-scale lockdowns began in the country
collapse China’s real estate sector stopped the economic growth machine and provoked an increase in unemployment. Western consumer goods manufacturers with a significant presence in the country may soon experience a domino effect.
background
Back in the late 1990s, foreign visitors to China were struck by its double-digit GDP growth rates and low inflation. Villagers moved to the coast to live in factory dormitories and work 80-hour weeks producing knick-knacks for the world. Farmers harvested agricultural products and sold them in “free markets” that opened up across the country, then took the money home and built themselves new homes.
For previous decades, the country had been in poverty, with high savings but no investment in industry or infrastructure. Suddenly, everything changed: trade became possible, and the standard of living for all Chinese people began to rise.
It was a great period: thirty years of optimism, thirty years of growth fueled by investment. The machine malfunctioned in 1998 and once more in 2008, but the authorities responded by flooding the economy with investment capital.
When Beijing became wary of a sharp decline in international demand for its exports due to the 2008 global financial crisis, it decided to redirect resources to the real estate market. In previous decades, investment was mostly in infrastructure (roads, railroads, telecommunications, and computerization) that increased productivity, but following 2008, the Chinese government began to force-feed the economy with capital to keep it running. As a result of these events, productivity began to decline.
The situation in the Chinese labor market worsens
All it took was a slight push to end it all, which happened along with the collapse of the real estate market in the summer of 2021. Now all the news in the country is regarding unemployment: the government reports that regarding one-fifth of young people under the age of 25 who are looking for work cannot find one.
Although statistics on employment among the elderly are not transparent, periodic independent surveys in rural areas indicate a high level of unemployment. Civil servants in the richest regions of the Middle Kingdom are suffering from massive pay cuts.
Foreign investors have long held the view that only the 350 million sufficiently solvent Chinese living in coastal cities matter to the country’s economy. But even these richer people are feeling the decline in employment: banks, private education, brokerage houses and businesses in other industries are laying off most of their workforce. The press is full of reports of layoffs at technology companies. The pharmaceutical sector is losing staff. Personal income tax revenues are falling.
Former powerful companies such as Tencent are selling off assets. Warren Buffett’s Berkshire Hathaway is selling its stake in electric vehicle maker BYD. The founder of Huawei told employees that the company should focus on “survival.” Hong Kong-listed Chinese developers reported their profits were down 87% in 2022.
Consumption is declining
To combat these problems, Chinese banks are cutting rates and lending furiously. central bank fights with the fall yuanapparently spending its foreign exchange holdings, yet everyone expects the Chinese currency to break the 7:1 mark once morest the US dollar soon.
The unemployment rate says little in a country that hasn’t adjusted to changes in the labor force since 1995. These statistics in China do not take into account rural residents (regarding 60% of the population), as well as most freelancers and temporary workers. People who do not have employment contracts are very poorly taken into account, and this is the majority of migrants working in cities. We also know that China is doing its best to hide its problems from the outside world.
But it’s getting harder as public company performance continues to disappoint. High unemployment means lower incomes, lower spending and even higher unemployment. We will see declines in sales from major consumer goods companies such as Coca-Cola, Unilever, Tingyi and Unipresident.
Smartphone sales are plummeting. Nike’s forecasts are pessimistic. In the last quarter, Starbucks sales fell 40%. China will no longer be the capital of luxury spending. In addition, demand for commodities such as coal is also falling. copper and iron ore.
Prepared by ProFinance.ru by materials TheMarket.ch by Ann Stevenson-Yang, co-founder of J Capital Research
MarketSnapshot — ProFinance news. Ru and market events in Telegram
On this topic:
Goldman Sachs and Nomura cut China’s GDP forecast once more
BHP expects Chinese economy to grow
China’s oil demand might fall for the first time since 2002
China’s car traffic drops amid new lockdowns
