China’s economic storm sends ripples worldwide. What’s the impact on metals, markets, and more?
China’s economy is hitting the brakes. We are not just saying this; the data is shouting it out loud!
China has been in the headlines for all the wrong reasons lately. Their economy is on a downward spiral because of issues like a property market shakeup, a drop in exports, and weak consumer spending.
Now, while other countries are busy playing the interest rate seesaw – some hiking up rates, others are sitting on a pause, but China has taken a different route. They are cutting interest rates. But why, you ask? Well, it’s all about to boost borrowing and spending. The idea is to encourage economic growth. But there is a catch. If they go overboard with these rate cuts, it could lead to over-borrowing, making the existing debt problem even worse.
So, here’s the big question for the day: Is China’s economic shakeup a storm that could drench the world economy? Let’s find out!
What’s Happening?
A few days back, the Chinese credit data and the GDP numbers were declared, which was disappointing. According to a CNBC report, the credit data for July, which came out on August 11, 2023, indicated a slump in demand from businesses and households to borrow money for their future plans.
But the story does not end here. Some of the credit numbers from China are painting a bleak picture. The new local currency bank loans experienced a steep dive by a whopping 89% in July 2023 compared to June. And guess what? This nosedive brings us to a level we haven’t seen since the aftermath of the global financial crisis 2009, as per the data from the People’s Bank of China, reported by Reuters.
Now, let’s take a peek at the GDP numbers. China’s GDP growth story is shifting gears. Reuters data shows it grew by 0.8% QoQ in Q2 vs 2.2% in Q1.
China’s Real Estate Crisis
China’s real estate mess is way bigger than it might seem. Now, the real estate business contributes a whopping 30% to the country’s economy.
Evergrande Group, a leading real estate company in China, is deep in debt and has filed for bankruptcy protection in a U.S. bankruptcy court. Another company called Country Garden defaulted coupon payments for two dollar-dominated bonds.
Let’s rewind to a South China Morning Post survey done last year. It was found that more than 70% of China’s ‘household wealth’, which is simply how much money families have, is tied up in the property market. If property prices fall, loans could end up being worth less than what was borrowed. That could lead to more people being unable to pay back loans, which is bad news for the Chinese economy.
So, there you have it – China’s economy is in the middle of a storm, and the waves are far from calming down.
Ripples of China’s Economic Slowdown on the Global Economy
China isn’t just any random player; it’s the heavyweight champion in manufacturing and shipping goods all over the globe. Plus, it is the largest consumer of essential commodities, including metals.
Now, if we focus on some data, according to the Ministry of Foreign Affairs and Trade, retail sales in China fell by 12.7% YoY in May and grew modestly by 3.1% in June YoY. Manufacturing activity contracted from April to June. New homes and investments in buildings also went down.
Lastly, if we look at export data, China’s exports dropped by 12.4% YoY in June and went down even more by 14.5% YoY in July.
So, if China’s economic engine starts breaking down, the global system will also get shaky.
And the results can be seen in the contraction of the prices of base metals as well. According to the data from Investing.com, if we look at the one-month performance of key metal futures contracts from 23rd July to 22nd August 2023, copper is down by 6.43%, aluminium is down by 5.08%, nickel is down by 3.63%, and zinc is down by 6.96%.
What’s Next?
Looking at the bright side, India is making the most of the China+1 Strategy. But here’s the thing: China isn’t just known for its production capacity but also for its huge consumption capacity of metals.
China is not doing so well and this could make the prices of these metals drop significantly as it already has, and that’s not good for companies in India that work in metals and minerals as their profits could also take a hit.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*The article is for information purposes only. This is not an investment advice.
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