Five reasons for the Chinese economic crisis

China’s economic growth has slowed due to a strict zero-covid policy and reduced global demand. Government growth figures for July to September will be available shortly. A contraction of the world’s second largest economy would increase the risk of a global recession.

Achieving Beijing’s growth target of 5.5 percent now seems impossible. However, civil servants are reluctant to give too much importance to achieving goals. China somehow avoided the contraction from April to June. Several economists do not expect China’s growth to pick up this year.

China may not be dealing with hyperinflation like the US and UK. But the country faces several other problems. Known as the ‘factory of the world’, the country suddenly saw a decline in domestic and international buyers. China’s growth is also hampered by trade tensions with major economies such as the US.

At the same time, the Chinese currency, the yuan, is at its lowest level against the US dollar in decades. The weak currency worries investors and increases uncertainty in the financial markets. It also complicates the central bank’s initiatives to ensure more money flows into the economy.

All of this is happening as President Xi Jinping heads for a third term as leader of the Chinese Communist Party Congress. The party’s congress will begin on October 16.

The British media BBC has highlighted five reasons for the economic crisis in China in a report.

Adding to the chaos is zero covid

The coronavirus outbreak in several cities, such as Shenzhen and Tianjin, manufacturing regions, has disrupted the country’s industrial activities. People spend less on food, drink, retail or tourism. That has put important services under pressure.

According to data from China’s National Bureau of Statistics, the country’s manufacturing activity picked up in September. But the reason behind this activity is that the government has increased spending on the infrastructure sector. And after two consecutive months of no growth in production, it seems so. The government’s claim has been called into question after private reports suggested a production decline in September. According to private surveys, output, new orders and employment are declining due to demand.

The demand for goods in countries like the US has fallen due to high interest rates, inflation and the war in Ukraine.

Experts say Beijing needs to do a lot to revive the economy. But they say there is no situation to do anything important until the end of the zero covid policy.

“If commerce isn’t growing or people aren’t able to spend, there isn’t much of a need for more money to flow into our economy,” said Louise Quiges, Asia chief economist at S&P Global Ratings.

Government initiatives are insufficient

In August, the Chinese government began taking initiatives to resolve the stagnant economic situation. At that time, a 1 trillion yuan plan was announced to alleviate the stagnation of small businesses, infrastructure and housing. But experts say the government can do more if it wants to achieve the desired growth and create jobs.

Possible government initiatives include investment in infrastructure, easing lending conditions for domestic buyers, developers and local governments, and tax cuts for households.

Quizzes showed that the government’s response to the weak economy was nothing short of extraordinary compared to previous economic crises.

Crisis in the housing sector

There is no doubt that growth has slowed due to lower commercial activity and negative sentiment in the housing sector. It has a major impact on the economy. Because housing and other sectors account for a third of the country’s GDP.

Quizzes said that when confidence in the housing industry is low, people question the overall economic situation.

The home buyers refuse to pay the installments on the unfinished buildings. Many people are afraid of whether their house will be built at all. Demand for new homes has fallen, reducing the demand for imported goods needed in the construction industry.

Despite the government’s efforts to boost the housing sector, house prices have fallen by more than 20 percent this year in several cities across the country.

Analysts say authorities need to do much to restore confidence in the sector as housing traders are under pressure.

Climate change worsens the situation

Extreme weather is beginning to have a long-lasting impact on Chinese industry. In August, cities in southwestern Sichuan and central Chongqing suffered severe heatwaves after a drought. This increases the demand for air conditioners, which puts pressure on the electricity grid. The region is largely dependent on hydropower for electricity.

Factories that produce major products, such as iPhone maker Foxconn and Tesla, were forced to reduce their working hours at the same time.

According to data from China’s Bureau of Statistics in August, profits in the iron and steel sector fell 80 percent in the first seven months of the year compared to the same period last year.

The government came up with billions of dollars to support energy companies and farmers.

Tech companies are losing investments

Two years of monitoring China’s major technology companies is not conducive to growth. Tencent and Alibaba recently reported their first ever sales decline. Tencent’s profits fell 50 percent and Alibaba’s total sales fell by half.

Millions of young workers lost their jobs. Which exacerbated the employment crisis. One in five 16- to 24-year-olds is now unemployed. That could reduce China’s production capacity and growth in the long run.

Investors are also seeing changes in China. Xi Jinping is stepping up private sector surveillance to further consolidate power. In such a situation, the state-owned enterprises began to receive benefits. Foreign investors have started withdrawing funds.

Japan’s Softbank has withdrawn a major investment from Alibaba. Warren Buffett’s Berkshire Hathaway sells its stake in electric car maker BYD. This year, investments worth $7 billion have been withdrawn from Tencent.

At the same time, the United States has tightened supervision of Chinese companies listed on the US stock market.

S&P Global Ratings – noted in a recent note that certain investment decisions are being delayed. Some foreign companies are considering expanding their production in other countries.

The world is getting used to Beijing not being as open for business as it used to be. But Xi Jinping is putting the economic success that China has supported in recent decades at risk.

Source: BBC

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