The Chinese economy was already on shaky ground in 2023, but several new developments have indicated that the decline may accelerate.
Recent data indicate that foreign direct investment (FDI) in China has fallen by a steep decline, and is now nearing some of the lowest levels seen in the 21st century.
In the first quarter of this year, FDI in China declined to $20 billion, representing an 80% decline from the $100 billion FDI seen during the first quarter of 2022. However, the FDI situation worsened in the second quarter, when FDI declined to just $4.9. Arablowest level seen since 1998,
Last year, China was the second largest recipient of global FDI, right after the United States – both attracted $189 billion and $285 billion of FDI respectively last year.
The US also sees a decline in FDI in 2023, but it is much less severe than in China. In the United States, FDI declined by about 20% during the first five months of the year.
Furthermore, the decline in FDI to China appears to be a symptom of a larger problem. In addition to waning interest from foreign investors, China’s currency is also falling. On 17 August, the dollar/yuan exchange rate fell to 7.32, the weakest level for the yuan since 2007. However, the yuan has strengthened slightly since then.
Today, about 7.20 Chinese yuan is needed to buy one US dollar, compared to 6.40 in early 2022, as shown below.
Like a sharp decline in FDI, a devaluation in the yuan has been linked to declining confidence in the Chinese economy.
Speaking of the current environment, John Ramig, an attorney at the Buchalter law firm, recently told Reuters, “I don’t have a single client who wants to invest in China. Not a single client.” And it represents a sharp change from several years ago, when global companies were struggling to inject new capital into the Chinese economy.
Elaborating on the change in sentiment, Ramig said, “Everyone is either looking to sell their Chinese operation, or if they are sourcing products in China, they are looking for an alternative place to do so.” Looking for.”
Providing further evidence of these trends, The Wall Street Journal recently reported that Crane – a large US manufacturer of vending machines – is reducing its investment in China, partly due to “policy uncertainty” related to China. because of.
As most investors and traders are well aware, the United States government has been steadily reducing high-tech exports to China, especially advanced semiconductors. Further, the export limits are expected to be announced in the near future.
Consequences of the US-China trade war
China certainly faced headwinds related to its domestic economy in 2023, but the ongoing cross-border trade war has also taken a toll on the Chinese economy.
In addition to the falling value of the yuan and a sharp drop in FDI, China’s ongoing trade war with the United States has resulted in a number of other negatives.
During the first six months of 2023, Chinese exports to the US account for only 13% of the total, marking a significant decline from 2017 (the year before the trade war began), when the figure stood at close to 22%. According to data compiled by the US Census Bureau.
This represents the lowest percentage since 2003, meaning Chinese exports to the US have fallen to a 20-year low by that measure. And as one might expect, other countries are struggling to make up for the shortfall.
Some of the biggest beneficiaries of China’s declining influence in the US market include many of its neighbors in the Asia-Pacific region, as well as Mexico. For example, India, Thailand and Vietnam now account for about 25% of all US imports, according to Census Bureau data.
For its part, Mexico has also stolen some of China’s power. When accounting for the combined value of all imports and exports, Mexico is now the top trading partner of the United States. China has now slipped to third place, while Canada remains in second place.
During the first half of 2023, Mexico and Canada will account for 15.7% and 15.4%, respectively, of US imports. As mentioned earlier, China’s percentage of US imports has dropped to 13%.
And there are lots of practical examples that help illustrate where these losses are coming from.
For example, Apple (AAPL) is slowly moving its production out of China to other countries—especially India. As a result, the Chinese share of US smartphone imports has dropped below 80%, which was the norm for many years.
Similarly, US furniture imports are also slowly shifting away from China in favor of Canada, Mexico and Vietnam. In 2020, those three countries accounted for about 40% of US furniture imports, but in 2023, that figure is set to grow to 50%.
Such trends have contributed to the slow deterioration of China’s prestigious trade relationship with the US, as explained below.
The above data highlights how US-China trade relations have been shrinking since the start of the trade war in 2018.
China’s growing economy and asset crisis
The trade war has produced negative consequences for both countries, but the overall effect has arguably been worse for the Chinese economy, which is now growing at its slowest rate since the early 1990s.
In contrast, growth in the US economy has been relatively resilient in recent quarters, despite significant headwinds presented by higher interest rates.
Given that position of relative strength, the US government has been unwilling to make the necessary concessions to resolve the trade war. Instead, it appears that the US is trying to use its leverage in an effort to finally get some concessions from China.
in the presence of 17 July bloomberg televisionTreasury Secretary Janet Yellen said that China had failed to address the unfair trade practices that originally sparked the trade war, and that the US would not remove the tariffs until those concerns were addressed with meaningful reforms. Will not be ready for.
Overall, the news from China has not been favourable, and it may get worse going forward.
The Chinese yuan has depreciated 15% against the dollar, FDI into China has plummeted, and China’s share of total imports into the US has fallen to a 20-year low.
As if all this wasn’t enough, Country Garden, one of China’s largest property developers, failed to make required interest payments on some of its dollar-denominated bonds in early August, and as a result, is currently on the brink of collapse. To make a mistake
The collapse of Country Garden is particularly worrying as Evergrande, one of China’s other large property developers, officially filed for bankruptcy on 17 August. And according to credit rating agency Standard & Poor’s, more than 50 Chinese property developers have defaulted or failed to make loan payments in the last three years.
As a result, the problems in China’s real estate market appear to be systemic rather than isolated within a small group of companies/sectors.
As Larry Hu, chief economist for China at Macquarie, underlined, any further downturn in the Chinese economy could have a major impact. Who recently told new York Times“A slowdown in China is definitely going to impact the global economic outlook. Because China is now the No. 1 commodity consumer in the world, the impact is going to be huge.”
For the above reasons, investors and traders will want to closely monitor the health of the Chinese economy going forward, as further deterioration of financial conditions in China could eventually spill over into global financial markets.
To track and trade the Chinese financial markets, readers can add the following China-focused country ETFs to their watch lists:
- Extractors Harvest CSI 300 China A-Shares ETF (ASHR).
- Cranshare CSI China Internet ETF (KWEB).
- iShares MSCI China ETF (MCHI).
- iShares China Large-Cap ETF (FXI).
- SPDR S&P China ETF (GXC).
- Invesco China Technology ETF (CQQQ).
- WisdomTree China Ex-State-Owned Enterprises Fund (CXSE).
- Cranshare Bocera MSCI China A Shares ETF (KBA).
- Global X MSCI China Consumer Discretionary ETF (CHIQ).
- iShares MSCI China A ETF (CNYA).