The economic stagnation in China, caused by a decline in domestic demand, a crisis in the construction industry, and decreased consumer activity, is posing the risk of the nation’s economy heading towards a situation reminiscent of Japan in the early 1990s. As regards the effect on the global economy, these trends lead to reduced prices as well as a shift in trade patterns, which, in turn, drastically change the balance of power in the global commodity market.
The construction sector, which previously accounted for roughly 23% of China’s GDP, is now experiencing a substantial decline. Such factors as overheating in the industry along with limited financing, halted major infrastructure projects as well as considerable layoffs, negatively affect the demand for materials such as cement and metal that were previously supplied to large construction sites across the country. Accordingly, reduced demand for raw materials provokes slumping prices for these resources globally.
Additionally, the country is forced to respond to increasing external restrictions every year, such as those affecting the imports of Chinese goods like electric vehicles to European countries. China might respond by reducing exports of scarce resources, such as rare earth metals mined on its territory, which could lead to a greater pressure on importing countries and create a considerable shortage of raw materials in industries dependant on Chinese supplies.
Currently, China’s levels of oil and energy imports at reduced prices remain consistent; this allows for controlling domestic costs of raw materials amidst weak demand, thus creating a safety cushion for the economy.
Chinese customs reported the country’s oil imports at 11 million barrels per day in September 2024, only slightly lower as compared to last September and averaging for the past six months to a year. The average import price plummeted along with global prices, amounting to $ 77.2 per barrel, or about $3 less than the price of one barrel of Brent crude oil in August.
China’s strategy for preserving energy efficiency is crucial in this regard, which is due to the country’s efforts to modernize its energy infrastructure. According to various sources, the cost of energy per unit of GDP has decreased by 5-15% over the past two years.
China’s economic slowdown requires investors and asset managers to reevaluate their investment strategies. Lower demand for metals and construction materials causes fall in their prices, so investors should consider reducing the share of these goods in portfolios. Instead, they should focus more on sectors like technology and electronics, which, despite the overall slowdown of the Chinese economy, continue to experience robust growth. For instance, this year the electric vehicle industry grew by 48.5% against last year. Similarly, the increase in the industrial robots sector was 22%.
In parallel, as previously noted, the country continues its efforts to modernize the national energy system, boosting its efficiency and reducing the consumption of imported energy. This encourages the growth of demand for alternative energy sources, providing opportunities for investment in companies engaged in renewable energy and energy-efficient technologies.
In an effort to resolve the current economic problems, China has turned to the experience of Japan and the United States as models for preventing adverse scenarios. The Japanese asses price bubble that burst in the 1990s was followed by interest rates falling for nearly another nine years; the government’s slow response measures led to consumers developing long-lasting expectations of deflation, which significantly hindered the economic recovery.
Unlike Japan, China has chosen to focus on quick action, promptly cutting interest rates and providing support to companies in financial troubles in order to mitigate overall economic risks. This is very similar to approach taken by the US. At the same time, China has been slowly devaluing its currency to avoid sudden fluctuations, with the yuan decreasing from 6.32 to 7.2 per dollar over the past two years. These efforts allow the country to avoid major currency risks.
A demographic shift is a separate long-term challenge for China, such as a population decline and rising youth unemployment. These factors negatively affect the dynamics of domestic demand, reduce employment levels, and may lead to a reduction in output.
As of 2023, China’s population stood at 1.41 billion, the biggest decline the country has seen since 1961, which is having a negative effect on the demand for goods and services. With an ageing population and rising unemployment, the Chinese government has even stopped releasing official youth unemployment statistics, which I think just goes to show how serious the problem is.
The lack of young workers to support productivity and consumption is eroding China’s competitive advantage it has boasted due to cheap labor. This, in turn, changes the country’s standing on the global scene.
We observe China’s FDI flow turning negative for the first time since 1998; this signals a shift in priorities among global investors, who are increasingly looking towards countries that have more stable demographic indicators and higher employment rates, creating opportunities for other regions to grab the niche that once belonged to China.
By Igor Isaev, Head of Analytics Center, European broker Mind Money