On China’s Great Economic Slowdown: Here is Everything you need to know PART.1

I have been living in China for more than 15 years, the experience allows me to have a closer look at the Chinese Economy.

The Chinese economic system has been perceived by many as a black box, as foreign business entities often face a completely different set of rules. Businesspeople with experience operating in China agree that it can be challenging and different for foreigners to start or run a business there.

It is worth noting that the Chinese government has historically taken a more active role in regulating their economy than Western countries.

Here is Everything you need to know about China’s economy:

I. China has a shrinking export problem.

China’s economic model relies heavily on exporting and manufacturing products to other economies, with tensions between the US and China arising, global buyers are shifting their orders to India and other southeast nations. With fewer buyers paying for goods, China’s economy is inevitably slowing down, and there will be more trading deficit.

China’s exports in 2024 could potentially decrease due to several factors:

1. Global Economic Slowdown(Demand side) :

If the global economy continues to experience a slowdown, demand for Chinese goods in key markets like the United States, Europe, and Asia could decline. A weaker global demand impacts China’s export volumes directly.

2. Trade Tensions and Tariffs:

Ongoing or increased trade tensions with major trading partners, particularly the United States, could lead to higher tariffs on Chinese goods. This makes Chinese products more expensive abroad, reducing their competitiveness.

3. Supply Chain Realignment:

The COVID-19 pandemic highlighted vulnerabilities in global supply chains heavily reliant on China. As a result, many companies are diversifying their supply chains, reducing dependence on Chinese manufacturing. This shift could lead to a decrease in orders for Chinese exports.

4. Currency Fluctuations:

The value of the Chinese yuan against other major currencies affects export attractiveness. A stronger yuan makes Chinese goods more expensive for foreign buyers, potentially reducing export volumes.

A stronger Yuan will recover the faith and confidence of households, but a stronger Yuan will hurt exports.

5. Internal Economic Policies:

Domestic policies in China, such as efforts to boost internal consumption and move up the value chain to produce higher-technology goods, might shift focus away from sectors that have traditionally driven large volumes of exports.

These factors combine to create a scenario where China may see a reduction in its exports in 2024, influencing both its economy and global trade dynamics.

II. China is losing Capital and long-term investments (losing confidence of foreign capital)

China’s domestic economic growth relies heavily on FDI(Foreign Direct Investment). Foreign Direct Investment is a long-term investment that won’t flow out easily but with the following chart, China’s FDI outflow for the first time in history.

China has been experiencing challenges in attracting and retaining foreign direct investment (FDI) due to several key factors:

1. Political and Regulatory Environment

Increasing Control: The Chinese government has tightened controls over various sectors, especially in technology and private education, which has raised concerns among foreign investors about the predictability and stability of the regulatory environment.

National Security Laws: Laws that are framed around national security concerns, such as the cybersecurity law, can impose stringent operational conditions on foreign firms, making the business environment less welcoming.

2. U.S.-China Tensions

Trade Wars and Tariffs: The trade tensions between the U.S. and China, which began escalating in 2018, have resulted in tariffs and other trade barriers. These make it costlier and more complex for foreign companies to operate in China.

Technological Decoupling: Efforts by the U.S. to limit the transfer of technology to Chinese firms, citing national security concerns, have increased the risks for foreign businesses that rely on cross-border technology exchanges.

3. Economic Policies and Shifts

Dual Circulation Strategy: China’s new economic policy emphasizes self-reliance, particularly in technology. While aiming to boost domestic consumption, this strategy may limit opportunities for foreign companies, especially in high-tech industries.

Market Access Restrictions: Despite promises of opening up, China still imposes restrictions on foreign entry and operation in key sectors like finance, healthcare, and digital services.

4. Supply Chain Diversification

Pandemic and Geopolitical Risks: The COVID-19 pandemic exposed the vulnerabilities of relying too heavily on any single country for manufacturing and logistics. In response, companies are diversifying their supply chains, reducing dependence on China.

Nearshoring and Reshoring: Companies are moving production closer to their primary markets or back to their home countries to mitigate risks and respond more agilely to market changes.

5. Intellectual Property Concerns

IPR Violations: Intellectual property rights enforcement remains a significant concern in China. Foreign companies often face the risk of IP theft or forced technology transfers as conditions for market access.

6. Labor Costs and Market Saturation

Rising Costs: Labor costs in China have been rising steadily, reducing one of the key advantages of manufacturing in the country.

Competition: The Chinese market is becoming increasingly saturated and competitive, making it difficult for new foreign entrants to establish themselves.

These factors collectively contribute to a more challenging investment climate in China for foreign companies, leading to a reconsideration of their investment strategies and often a reduction in their investment levels.

III. Overleveraging and Bad Debt Problem in the Real Estate& Banking Sector.

China's economy is quickly accumulating a massive amount of debt.

Now let’s take a look at the housing sector:

Both property sales and started residential buildings are plummeting.

Since there are massive amounts of people who invest in the housing sector, their wealth heavily relies on the property value.

1. When the economy slows, people have less income and can not afford to buy new houses even though the price of first-tier city houses has dropped.
2. With giant real estate developers like Evergrande defaulting on their bonds, it will create massive amount of bad debt for China’s banking sector.
3. When the property value goes down, households are squeezed by leverages(their mortgages), and with less cashflow available on hand they have to default on their mortgages or bankrupt.

The housing market meltdown will cause more chain-react effects on the banking sector (I will explain this in my next article).

1. Commercial Bank's balance sheet will further deteriorate.
2. The banking sector will emerge with liquidity problems.
3. Super Margin Call if house value drops above 20%.

IV. China has Capital Outflow and deflation problems.

1. Rich people are taking their wealth offshore and potentially migrating to other countries to protect their assets.
2. Wealthy individuals are moving their assets out of China
3. With the Chinese business environment worsening, consumers are reluctant to spend money, they rather save their money in the bank meaning the economy with slow further and become more deflationary.

to be continued..