Quick Bites | China is Struggling

China’s economy is struggling. July data suggest the government will have to provide more stimulus to meet its 5% economic growth target for the year. Last month saw an unusual decline in bank loans, suggesting a lack of confidence among businesses and consumers, potentially leading to reduced investment and spending.

China’s real retail sales rose just 2.2% y/y during July, well below the 5.1% y/y increase in its industrial production. The excess production is getting exported, which has other countries protesting that China is dumping goods in global markets and exporting deflation.

In July, home prices in China continued to decline. New home prices fell for the 13th consecutive month, dropping by 0.7% m/m and 5.0% y/y, the steepest annual decline in nine years (see chart below). Despite efforts by the Chinese government to stabilise the housing market, including reducing mortgage rates and lowering home buying costs, these measures haven’t worked so far.

The struggling real estate sector is depressing steel output. During July, it dropped by 9% y/y. This is really bad news for Australia, as iron ore is our biggest export, and if steel output is depressed, there is less demand to import our iron ore. Iron ore prices are already reflecting this.

Given the significant negative wealth effect from falling real estate and stock prices, it’s no wonder that consumer confidence remains very depressed in China.

None of this news is good for Australia as China remains our largest trading partner by a large margin. What happens in China is reflected in our exports volumes, in commodity prices, in our currency and in the tourism and education sectors.

A depressed China will put pressure on our domestic economy and therefore remains something we continue to monitor closely.

Source: Yardeni Research