While U.S. equities are melting up, China is showing increasing risks of a melt down.
Chinese Exports Fall at Steepest Pace Since February 2020 Slide in outbound shipments reflects fraying trade ties with the Western world, even as exports to Russia boom
(…) Overseas shipments from China slumped 14.5% in July from a year earlier, the steepest year-over-year decline since February 2020, in the earliest days of the Covid-19 pandemic, data released Tuesday by China’s General Administration of Customs showed.
Compared with those of a year earlier, China’s exports to the U.S. and European Union plunged by more than 20% each last month. There was a lone bright spot: Chinese shipments to Russia soared in July, calculations from the customs data show. (…)
July’s 14.5% drop in Chinese outbound goods shipments was sharper than the 12.4% year-over-year decline in June and outpaced the 12% decline expected by economists polled by The Wall Street Journal.
Chinese goods shipments to the U.S. fell 23% in July compared with a year earlier. Shipments to the European Union and to the Association of Southeast Asian Nations, a group of 10 countries that includes Singapore and Indonesia, each dropped by about 21%. (…)
Chinese shipments to Russia, a country under Western sanctions over its invasion of Ukraine, rose 52% in July from a year earlier, helped by sales of high-value goods including automobiles. For the first seven months of this year, Chinese exports to Russia soared 73% from a year earlier, even as China’s total exports have fallen 5%, data from Chinese customs show. (…)
Chinese imports also fell by more than expected in July, falling 12.4% compared with last year, versus June’s 6.8% decline, marking the worst month of year-over-year declines since January and well below the 5% drop expected by surveyed economists.
The fall in Chinese imports, which include intermediate goods that Chinese companies turn into finished products, reflects the broader weakness in the entire chain of global manufacturing, analysts say. It also shows just how tepid domestic consumption remains, even with China’s economy freed from Covid-related curbs for more than six months.
Economists say the latest raft of soft economic data will likely prompt Beijing to consider more stimulus measures.
Chinese officials have already ordered local governments to more quickly issue bonds to fund infrastructure spending, a move that could boost China’s appetite for commodities and help Chinese imports regain ground in the coming months, say economists from Capital Economics.
- China Slips Into Deflation in Warning Sign for Global Economy China entered deflationary territory for the first time in two years, pressuring Beijing to avoid a deepening economic malaise.
(…) Prices charged at the factory gate, which have been contracting on a year-over-year basis since last October, fell 4.4% in July from a year earlier, narrowing from June’s 5.4% decline, according to data published by China’s National Bureau of Statistics on Wednesday.
But it was consumer-price inflation, which had remained positive even as producer prices turned negative, that marks the bigger shift. Last month’s 0.3% drop, after a flat June, was the first decrease since February 2021, a reading thrown off by year-over-year comparisons to the early days of the pandemic, when supply chains and food prices were in disarray.
Apart from November 2020, when the pandemic was rattling the economy, consumer and producer prices hadn’t been in deflationary territory together since 2009, at the depths of the global financial crisis. (…)
Stripping out volatile food and energy prices, so-called core inflation rose to 0.8% in July, the highest level since January, from 0.4% in June. (…)
Even though producer-price deflation eased in July, the 4.4% drop was worse than 4.1% expected by economists polled by The Wall Street Journal. (…)
Bloomberg adds:
(…) “With the impact of a high base from last year gradually fading, the CPI is likely to rebound gradually,” Dong Lijuan, chief statistician at the NBS, said in rare additional comments to accompany the official data. Chinese authorities have recently sought to prevent economists from discussing deflation in a bid to promote positive narratives about the economy. (…)
Beijing has tried to downplay the risk of deflation in the economy with some Chinese-based analysts saying they were instructed by regulators and their companies not to discuss the matter publicly. PBOC officials said last week that China will avoid deflation in the second half of the year, with consumer-price growth likely to trend closer to 1% by the end of the year. (…)
The core inflation measure, which excludes volatile food and energy costs, picked up to 0.8% from 0.4%, a sign of underlying — although subdued — demand in the economy. A breakdown of the consumer inflation figures showed prices for household goods, food and transport contracted, while prices of services spending, like recreation and education, climbed. (…)
Using the gross domestic product deflator — a measure of economy-wide prices — China was in deflation in the first half of the year.
Country Garden Holdings Co., helmed by one of China’s richest women, Yang Huiyan, has left investors in the dark after dollar bondholders said they’ve yet to receive coupon payments effectively due Monday. That puts the firm—which had 1.4 trillion yuan ($199 billion) of total liabilities at the end of last year—on course for its first public default if it doesn’t make the payments within a 30-day grace period.
Formerly the nation’s largest private-sector developer by sales, the builder of more than 3,000 housing projects in smaller cities is a household name and employed about 70,000 people at the end of last year. That status had given it the firepower to withstand an industry cash crunch that led to record defaults since Evergrande first missed bond payments in 2021. But tumbling industry home sales and soaring refinancing costs are threatening that streak.
“Any default would impact China’s housing market more than Evergrande’s collapse as Country Garden has four times as many projects,” Bloomberg Intelligence analyst Kristy Hung wrote in a report Wednesday. “Any debt crisis at Country Garden will have a far-reaching impact on China’s housing market sentiment and could significantly weaken buyer confidence on solvent private developers.”
No small stuff!
- Chinese exports to the U.S. fell 23% YoY in July. Shipments to the EU and ASEAN each dropped by about 21%.
- July China manufacturing PMI survey reveals that “new export business [new orders] contracted at a solid pace that was the fastest since September 2022” and that “competitive pricing strategies and price negotiations with clients led to another reduction in average output charges.”
- “July survey data highlighted a considerable decrease in eurozone manufacturing output. (…) weakness was broad-based (…) [with] demand conditions extremely weak”.
- “New Export Orders Index signalling the fastest reduction in international demand for ASEAN manufactured goods in four months.”
- In the USA: “Alongside evidence of subdued domestic demand, new
export orders fell for the fourteenth month running. Challenging economic conditions across key export markets, especially in Europe, were often linked by panellists to the decrease.” - While demand from its Western clients keeps weakening, Russia’s contribution seems to be waning as “new sales rose at the softest pace in 2023 to date as new export orders returned to contraction.”
Evidently, the goods inventory correction in the U.S. has spread across the globe and is particularly impacting China, already hurting from the trade conflict with the U.S. and the ongoing, perhaps accelerating, deglobalization in manufacturing.
(Ed Yardeni)
The hope was that domestic demand would offset weak exports but Chinese seem to prefer to boost their savings after a devastating pandemic and the demise of the housing market where the bulk of their savings reside.
The Chinese housing industry has been unraveling in slow motion for 2 years but the pace is accelerating with a risk of imploding under its mountain of debt. Xi and co. are trying to fix it but this is a confidence problem that can only go away after the industry restructures. How and when is not apparent just yet.
Here’s how the South China Morning Post described the housing market in June:
Grim figures for home sales in June in China show that the sector remains in crisis and will continue to weigh on the country’s economy as developers suffer amid a lack of buyer confidence.
Sales in June fell 28.1 per cent among the 100 largest developers by sales, compared to the same month last year when Covid restrictions were widely in place, according to CRIC, one of China’s largest real estate brokers. Sales rose 8.5 per cent month on month – the lowest recorded growth in what is normally a buoyant month.
Looking at just the top 25 developers selected by CGS-CIMB Securities, the news is even worse, as June sales fell 38 per cent year on year, said the firm’s managing director Raymond Cheng, citing CRIC’s data.
“We think further sales declines since April will lead to more liquidity issues for the sector and hurt China’s economic recovery as well as job creation,” he said. “Typically, developers report double-digit growth of 10 to 20 per cent year on year or month on month for June, before the liquidity issues started.”
The nightmare scenario is a collapse in prices. Recent stats indicate that secondary market prices declined 0.7% MoM in June after -0.4% in May.
Meanwhile, the government is widely expected to keep stimulating but this can only go so far when external demand is declining and the housing market, some 25% of the economy, needs a major intervention.
As BCA Research shows, China needs more and more capital to sustain growth.
Source: BCA Research via The Daily Shot
So, this is no slam dunk:
China to Be Top World Growth Source in Next Five Years, IMF Says Nation’s contribution of 22.6% seen as double the US portion
The nation’s slice of global gross domestic product expansion is expected to represent 22.6% of total world growth through 2028, according to Bloomberg calculations using data the fund released in its World Economic Outlook released last week. India follows at 12.9%, while the US will contribute 11.3%.
Source: Bloomberg using IMF WEO April 2023 forecasts
The emergency lender sees the world economy expanding about 3% over the next half decade as higher interest rates bite. The outlook over the next five years is the weakest in more than three decades, with the fund urging nations to avoid economic fragmentation caused by geopolitical tension and take steps to bolster productivity. (…)
