The yuan is on course for its worst year in decades as it plummets against the US dollar. A weak currency spooks investors, fueling uncertainty in fi
The yuan is on course for its worst year in decades as it plummets against the US dollar. A weak currency spooks investors, fueling uncertainty in financial markets. It also makes it difficult for the central bank to pump money into the economy.
All of this is happening at a time when the stakes are especially high for President Xi Jinping, who is expected to secure an unprecedented third term at the Communist Party Congress –CPC- which begins on 16 October, reports BBC.
Gto News presents this story by BBC, it describes the reasons why China’s economy is facing a difficult scenario after 2 years of pandemic and a zero-Covid policy
China’s economy is slowing down as it adapts to a punishing zero-Covid strategy and weakening global demand, reported BBC.
Official growth figures for the July to September quarter are expected next week, if the world’s second largest economy contracts, that increases chances of a global recession.
Beijing’s goal, an annual growth rate of 5.5%, is now out of reach although officials have downplayed the need to meet the target. China narrowly avoided contraction in the April to June quarter. This year, some economists do not expect any growth.
The country might not be battling steep inflation like the US and the UK, but it has other problems, the factory of the world has suddenly found fewer customers for its products both domestically and internationally. Trade tensions between China and major economies such as the US are also hampering growth, reported BBC.
So what exactly has gone wrong?
1. Zero Covid is wreaking havoc
Covid outbreaks in several cities, including manufacturing hubs like Shenzhen and Tianjin, have been hurting economic activity across industries.
People are also not spending money on things like food and beverages, retail or tourism, putting major services under pressure.
On the manufacturing side, factory activity appears to have climbed back up in September, according to the National Bureau of Statistics.
The rebound could be because the government is spending more on infrastructure.
But it came after two months in which manufacturing did not expand.
Demand in countries like the US has declined too because of higher interest rates, inflation and the war in Ukraine, reported BBC.
2. Beijing isn’t doing enough
Beijing has stepped in, in August it announced a 1 trillion yuan ($203bn; £180bn) plan to boost small businesses, infrastructure and real estate.
But officials can do a lot more to trigger spending to meet growth targets and create jobs.
This includes investing more in infrastructure, easing borrowing conditions for home buyers, property developers and local government, and tax breaks for households, reports BBC.
3. China’s property market is in crisis
Weak real estate activity and negative sentiment in the housing sector has undoubtedly slowed growth.
This has hit the economy hard because property and other industries that contribute to it account for up to a third of China’s Gross Domestic Product -GDP-.
“When confidence is weak in the housing market, it makes people feel unsure about the overall economic situation,” Mr Kuijs said.
Home buyers have been refusing to make mortgage payments on unfinished buildings and some doubt their houses will ever be completed. Demand is down for new homes and that has reduced the need for imports of commodities used in construction, reports BBC.
4. Climate change is making matters worse
Extreme weather is starting to have a lasting impact on China’s industries.
A severe heatwave, followed by a drought, hit the south-western province of Sichuan and the city of Chongqing in the central belt in August.
As the demand for air conditioning spiked, it overwhelmed the electricity grid in a region that almost entirely relies on hydropower.
Factories, including major manufacturers like iPhone maker Foxconn and Tesla, were forced to cut hours or shut altogether, reports BBC.
5. China’s tech titans are losing investors
A regulatory crackdown on China’s tech titans, which has already lasted two years, is not helping.
Tencent and Alibaba reported their first drop in revenue in the most recent quarter. Tencent’s profits fell by 50%, while Alibaba’s net income fell by half.
Tens of thousands of young workers have lost work, adding to a jobs crisis where one in five people aged 16 to 24 are unemployed. This could hurt China’s productivity and growth in the long run.
Investors are also sensing a shift in Beijing, some of China’s most successful private companies have come under greater scrutiny as Mr Xi’s grip on power grows.
As state-owned companies appear to be gaining favour, foreign investors are taking money off the table.
Japan’s Softbank pulled out a huge amount of cash from Alibaba, while Warren Buffet’s Berkshire Hathaway is selling its stake in electric vehicle maker BYD. Tencent has had more than $7bn worth of investments withdrawn in the second half of this year alone.
And the US is cracking down on Chinese companies listed on the American stock market, reports BBC.
“Some investment decisions are being postponed, and some foreign companies are seeking to expand production in other countries,” S&P Global Ratings said in a recent note.
The world is becoming accustomed to the fact that Beijing may not be as open for business as it used to be, but Mr Xi is risking the economic success that has powered China in recent decades, as reported by BBC.
