China plays a huge role in world trade, and if the country’s economy slows, the impact will be felt around the world. To give you a better understanding of what’s going on and what we expect to happen in the future, our experienced Kiplinger Letter team will keep you updated on the latest developments and forecasts (Get a free copy of The Kiplinger Letter or subscribe). With a subscription you will get all breaking news first, but many (but not all) forecasts will be published online a few days later. Here’s the latest…
Something is wrong with China’s economy. The end of COVID should give it a boost as Beijing ended its draconian lockdown measures. After a brief growth spurt, Chinese growth is declining. And when China’s economy slows, the whole world feels it, given China’s huge role in world trade.
Heed the warning signs emerging in China: The factory sector is shrinking as global demand for Chinese goods cools. Consumers struggling with inflation these days have less room in their budgets for non-essentials. Services and construction activity are declining. The same is true for retail sales and business investment.
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Of most concern is the real estate market, which peaked in May 2021. Since then, home sales have fallen by half. The price increases are weak. Many cities are filled with vacant housing, a legacy of over-development. Residential construction has long been a growth engine in China. But not now and not in the foreseeable future. Demand has not kept pace with the rapid pace of construction. China’s consumers have a lot of money. However, money is saved, not spent. Consumer sentiment is below pre-COVID levels. Beijing has tapped the potential to stimulate the economy by channeling credit into the real estate market. Lenders are already dealing with too many bad debts.
In the longer term, China faces an even bigger problem: population decline. The number of people of working age was already shrinking, and last year saw the overall population shrink for the first time in decades. Fewer people means fewer workers to contribute to GDP growth, fewer sales of goods and services, etc. There’s no getting around it.
With no housing to rely on, Beijing should try other types of incentives, such as cheap loans in the form of lower interest rates on different types of loans. But that carries the risk that an economy already mired in debt will end up with even more bad loans.
And there will be more spending on infrastructure, another old regime reserve. Details are few so far, but expect to hear about a major infrastructure initiative when Communist Party leaders meet in late July. Regardless of the form this pack takes, it does not fix the structural issues described above. That would require real reform.
For the US and other countries, China’s weakening means several things, including a relatively cheap yuan as a result of Beijing’s easing of lending. This in turn makes Chinese exports cheaper and goods from other countries more expensive in China. Global demand for commodities will ease somewhat as China consumes so many of the many commodities. That could dampen global inflation somewhat. And there will be no easing of Western sanctions and tariffs designed to punish Beijing for unfair trade practices or discourage aggressive actions toward Taiwan.
This forecast first appeared in the Kiplinger Letter, published since 1923, which is a collection of concise weekly forecasts of business and economic trends and expectations in Washington to help you better understand what’s ahead and how to make the most of your investments and your Money. Subscribe to the Kiplinger letter.
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