the author is the founder overshoot Co-author of Trade Wars Are Class Wars.
China’s crackdown on property developers and its draconian ‘zero-coronavirus’ policy is bad news for most citizens, but also bad news for foreign companies looking to profit from Chinese customers. .
But China’s domestic affairs also have a positive side. Weaker demand for imported metals, energy, food and capital goods is easing inflationary pressures elsewhere in the world. For the first time in decades, the country’s huge trade surplus is benefiting workers elsewhere.
The housing market downturn began last summer in response to government restrictions on mortgage borrowing and developer leverage. The homebuilder said he sold an average of 106 million square meters of residential floor space per month from April 2021 to June. This year, during the same period, Chinese developers sold only 106 million square meters per month.
The decline in demand has also spread to new construction, and the number of “construction starts” for April to June 2022 has decreased by nearly half compared to last year. The pace of home construction hasn’t been this slow since 2009.
The result is an additional supply to the rest of the world. Iron ore, coking coal and copper are essential materials in the production of construction steel, home appliances and electrical wiring. Before the recent recession, China consumed about two-thirds of the world’s iron ore and coking coal, and about 40% of its copper. Declining demand means lower prices. Compared to the recent peak of July 2021, iron ore futures prices have fallen by half, and Chinese coking coal prices have fallen by about a third. Global copper prices fell by a quarter despite tailwinds expected from additional climate-related green investment in the US and Europe.
This has wider implications. Residential real estate is also the only asset class widely available to Chinese savers outside of bank deposits, dwindling the value of Chinese stocks and bonds. Until recently, Chinese consumers borrowed from banks to buy new homes that had not yet been built as investment properties. Currently, developers are unable to complete projects due to lack of funds, some would-be homebuyers are refusing to make mortgage payments, and some local banks are taking depositors. Some people are rigid.
Moreover, China’s provincial and local governments relied on income from land sales for about a third of their spending. I don’t have that money anymore. Local government revenues from land sales so far this year are 31% lower than in the first six months of 2021, according to China’s Ministry of Finance.
While local government bond issuance has surged (the amount raised in May and June 2022 was the largest in two months), this is largely driven by cash flows rather than new investment spending. reflects a shortage of Some local governments have become desperate and are raising money from household savers at yields of around 9%, even though the central government is issuing 10-year bonds at yields below his 3%. increase.
The impact of China’s housing crash has been exacerbated by the government’s Covid-related restrictions. Chinese consumer spending in the first half of 2022 is slightly higher than in the first half of 2021 after accounting for inflation and is now more than 10% below pre-pandemic trends. Chinese oil refiners have processed 10% less crude since April compared to last spring, thanks to a plunge in gasoline demand. Electricity consumption, which was growing about 7% annually before the pandemic, is now growing at just 2%. China’s weakening provides a powerful counter-factor to the strain on the world’s energy supply caused by Russia’s invasion of Ukraine.
Weakness within China is crushing demand for goods from the rest of the world. In dollar terms, import spending has remained flat since the end of last year. Considering rising prices, China’s real import demand has fallen by around 8% since the lockdown began, according to estimates from the Dutch Bureau for Economic Policy Analysis. However, China’s exports continue to grow, providing the goods needed by foreign consumers and businesses.
In the past, the huge imbalance between China’s healthy exports and weak imports has dragged down the global economy, diverting income that would have been earned selling goods and services to Chinese customers from workers elsewhere. I took it away. But with inflation and commodity shortages now a bigger concern than underemployment, China’s problems may be what the rest of the world needs.