China’s economy is in decline, how will the markets react?
3 min readAccording to July data, the Chinese economy is in decline. The response to the report was the reduction of two key interest rates by China’s central bank, which seeks to support the weakening economy and the threat of recession. The newspaper drew attention to the news The Wall Street Journal.
China’s economy in decline
Earlier that week, we heard the economic activity numbers in China. National Bureau of Statistics of China reported that industrial production in the country increased by 3.8% year-on-year, which is decline compared to last month’s 3.9%. The expected increase, according to economists interviewed by the Wall Street Journal, was originally at the level of 4.5%. The decline affects all economic sectors including investments, employment rate or consumer spending.
I will also fall lowered the forecast for the growth of the Chinese economy for 2022 from the original 4.1% to 3.3%. Analysts at Standard Chartered wrote in a report to clients on the state of the Chinese economy: “We expect the road to China’s economic recovery to be difficult.”
Total GDP of the world. Source: visualcapitalist
Causes of decline
The causes of the economic decline must be seen in the current policy of the Chinese government headed by leader Xi Jinping. The government was minting zero tolerance policy towards covid enforced drastic lockdowns and enabled inflating the real estate and mortgage bubble. The fear of the Chinese to invest and even repay their mortgages also has its share. According to Monday’s report, it is one in five young Chinese unemployed, which is the worst situation since 2018 and represents up to 19.9% of the population. The real situation can, of course, be even worse.
According to Western analysts, even the current one escalation of the conflict with Tawain it is supposed to serve as a geopolitical distraction of the disaffected population from the poor economic situation of the country. As the current President of the People’s Republic of China, Xi Jinping, is about to run for president again the deteriorating state of the economy can be masked precisely by the escalation of the conflict with Taiwan.
China’s GDP decline. Source: tradingeconomics.com
The reaction to the worse numbers was the reduction of rates by the Chinese central bank, which occurred for the second time this year. According to economists, however, even this reduction will not be enough to prevent further decline in the world’s second largest economy. Julian Evans-Pritchard an economist at Capital Economics who specializes in China, commented:
“The People’s Bank of China is already responding to these headwinds by increasing support… However, with credit growth less responsive to policy easing than in the past, this is unlikely to be enough to prevent the economy from weakening further.”
Since, according to economists, China is not completely transparent in reporting the real state of the economy, the real state may be even worse. The decline of the second largest economy can cause massive turbulence not only in Chinese markets, but also on a global scale.
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