Our global macro analyst examines the current economic challenges that China faces and the consequent implications not only for its growth but also for the global economy.
- China-US trade tensions have extended to the EU, as Europe proposed sanctions on Chinese companies supporting Russia’s war effort.
- Chinese investment in Europe has experienced a sharp decline, signaling changing trends and increased regulatory scrutiny.
- Using Datastream we analyse the factors contributing to China’s economic challenges and the global implications of the US-EU-China trade conflicts.
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China currently faces various economic challenges that have significant implications not only for its growth but also for the global economy. Recent months have seen growing unease in China’s relationships with major global powers, particularly the US and the EU. This blog analyses the factors contributing to China’s subpar growth, the decline of Chinese investment in Europe, and how other export-dependent countries compare, highlighting the potential consequences for the global economy.
Trade tensions have escalated due to the US imposing export controls on China and the EU proposing sanctions that would target Chinese companies aiding Russia, leading to threats of retaliation. These trade conflicts and potential sanctions have far-reaching implications for both bilateral and global trade.
Key takeaways from our analysis:
- China-US trade tensions have extended to the EU, as Europe has proposed sanctions on Chinese companies that are supporting Russia’s war effort, making it the first attempt by the EU to impose sanctions on China
- Responding to the possibility of such sanctions, China has stated it will react in defence of the legitimate interests of the country and industry
- People’s Republic of China (PRC) officials have vehemently denied supplying weapons to Russia
- China remains a major source of goods for both the US and Europe
- Strong opposition to unilateral sanctions imposed by any country
China’s economic recovery following the COVID-19 pandemic has fallen short of expectations, raising concerns about the country’s growth prospects. Weak global demand for Chinese products is evident in the significant decline in new orders’ reported after the Canton Fair, one of China’s largest trade shows. This decline highlights the underlying challenges faced by the Chinese economy. To achieve sustained growth, prompt and effective policy measures may be needed to address weak domestic demand as domestic travel in China is nowhere near pre-pandemic levels.
In May, China’s economic landscape took an unexpected turn as factory activity contracted more rapidly than anticipated, casting doubt on the trajectory of its ongoing recovery.
The official manufacturing purchasing managers’ index (PMI) dropped to a five-month low of 48.8, falling below the critical threshold of 50 that delineates expansion from contraction. Chinese exports also shocked forecasters in May falling more than 8% on an annual basis compared to the expected 0.4% decline.
However, there are a few bright spots in the manufacturing sector, with China surpassing Japan as the number one exporter of vehicles, alongside an increase in the production of lithium-ion batteries, often used in electric vehicles.
On a relative basis, it looks like Chinese technology firms appear to be undervalued compared to their American peers. The ratio of the Nasdaq 100 to China’s Hang Seng Index shows recent all-time highs.
China’s investment in Europe has experienced a sharp decline, signalling changing trends and increased regulatory scrutiny. European governments, particularly in the United Kingdom, Germany, Italy, and Denmark, have imposed stricter rules on Chinese inbound investments, often preventing proposed infrastructure and technology projects from taking place. These regulations primarily target deals involving Chinese companies acquiring firms with potential military applications.
Key takeaways from our analysis:
- Lower than expected order flow as global demand for Chinese goods stumbles
- US/European companies that operate domestically in China are reporting weaker sales, adversely affecting profitability
- Companies citing weak Chinese demand
As the world’s second-largest economy, China’s economic trajectory holds significant implications for the global economy, encompassing various aspects such as growth rates, commodity markets, climate change, and geopolitics. While export growth has risen sharply in Vietnam since 2010, the much-heralded notion of India picking up China’s place as the world’s factory has not come to fruition.
The strained relationships between China, the US, and the EU, coupled with the decline in Chinese investment in Europe and weaker global demand, present significant challenges to China’s economic growth. Moreover, the potential imposition of sanctions and threats of retaliation further add to the uncertainty in the global economic landscape.
To navigate these complexities, it may be necessary for the Chinese government and the PBoC to implement monetary easing and supportive policies. These decisions not only shape China’s economic trajectory but also have far-reaching implications for global trade, investment, and inflationary pressures.