Insights

Is the Chinese economy in trouble?

By Paul Reid

15 May 2024

is china facing a crisis

Once again, Western media is suggesting that the Chinese economy is failing, and global market sentiment is already pulling the strings of influence on several China-related assets, but is the Chinese economy in trouble or is it simply propaganda intended to lead Asian market investors back to the West?

Let’s dig a little deeper into the claims of China’s weakening economy and see if the current pessimistic headlines will be here today… gone tomorrow.

Real estate crisis

Housing is said to be a strong indicator of a country's health. According to a report by the South China Morning Post, China Evergrande Group shares plunged by 79% after a 17-month trading suspension. The decline of China Evergrande Group signals a potential housing crisis in China, reflecting systemic issues like overbuilding, regulatory debt limits, and a vast housing surplus.

This sharp decline erased a substantial amount from its market capitalization as investors reacted to the company’s ongoing debt restructuring process. Evergrande is a property rock from which the entire sector depends, so when Evergrande struggles, you can be sure it’s not a small splash in the housing pond but a tidal wave, affecting confidence and financial stability across the board.

China's real estate isn’t just a national issue; it’s a global one. The Great Recession of 2008/9 began with a housing bubble in the US, which cascaded over to world banks. It’s not inconceivable that the next global downturn could start in China, but that is truly speculation at this point.

Keep in mind that pre-COVID, China’s construction efforts looked a lot like a runaway train. Now that the dust has settled, we might be seeing a simple correction from the extreme rather than a systemic decline.

Unemployment crisis

According to the last data released by China’s National Bureau of Statistics, the youth unemployment rate in urban areas hit a new high of 21.3%. It's so high now that officials have stopped reporting it, possibly to avoid public unrest. Stricter regulations, particularly in high-tech sectors have young graduates scrambling for fewer job opportunities. It's a tough world out there for the young and educated in China and there are no signs or announcements that the situation might improve.

High unemployment is also a strong measure of economic health, but China is not the only country facing such struggles, and if every other nation has an employment issue, then the influence on Chinese assets might get balanced out. An equilibrium of this kind might be most prominent in currency pairs, so don’t be surprised if the yuan is unable to form a trend due to contrasting volatility.

Demographic challenges

For the first time in decades, China's population is shrinking. This is a plot twist in China's growth narrative. With more people living longer, the shift towards an older demographic will likely strain government resources. More money will need to go into welfare and healthcare, testing the strength of public finances.

Similar to unemployment, a fall in birthrates and an aging population is something many countries are experiencing. This demographic shift can stir negative market sentiment and influence prices, but the struggles and challenges associated with population growth or decline are cumulative and won’t be a major obstacle for years. Nevertheless, if market participants get cold feet now, they’ll walk away without delay, regardless of the projected timeline.

Global economic integration

The economic relationship between China and its major trade partners, particularly the US and EU, has been under strain. Chinese banks are increasing scrutiny over trade with Russia due to the fear of new US sanctions, which indirectly affect China’s trade with its major partners.

Experts have debated the potential impact of China devaluing the yuan, which could have significant repercussions for the US economy. The US is considering new tariffs on China’s EV and solar sectors, which could have a more severe impact than the previous trade war, especially as China faces trade barriers.

The rise of China as a global economic player has disrupted the traditional dominance of the US and EU, leading to a complex web of trade, geopolitics, and technological rivalry. Despite the tensions, China overtook the US as the EU’s biggest trading partner in 2020, with trade worth $709 billion, compared to $671 billion worth of imports and exports from the US.

Assets to watch

Individual mega stocks such as Alibaba (BABA), Tencent (TME), and JD.com (JD) may be affected by negative sentiment. These companies are sensitive to changes in domestic economic policies and consumer sentiment.

Hong Kong 50 (HK50)

As one of the key indices representing significant Chinese companies listed in Hong Kong, HK50 could experience volatility due to its heavy composition of financial and real estate companies. A downturn in China's real estate market or financial distress would significantly impact this index.

USDCNY 

A struggling Chinese economy typically leads to a weaker Yuan as capital flows out, and the People's Bank of China might adjust policies to manage economic growth. This pair would be particularly volatile, with opportunities for trading on both short-term spikes and longer-term trend formations.

AUDCNY

Given Australia's economic dependency on China, particularly through commodity exports, the Australian Dollar often reacts to shifts in China's economic health. A downturn in China could lead to weaker demand for Australian exports, negatively affecting AUD.

Crude Oil

China's reduced economic activity could lead to lower oil demand, thereby influencing global oil prices. But trade oil with caution. Volatility is the norm right now, and with conflict and climate pressure rising, there will be surprises on the horizon. China is indeed a major oil importer, but trading on new headlines of China’s reduced purchasing is not wise. If you’re going to trade oil, always think globally.

Traders’ focus

Keep an eye on China's PMI data, GDP reports, and government policy news, as these indicators can provide early signs of economic changes. Tools like moving averages, RSI, and MACD can help identify trends and potential reversal points in the assets mentioned.

Given the potential for increased volatility, using stop losses and take profits can help manage risks associated with trading in these uncertain times. By focusing on specific assets, traders can better research the risks of a downturn in China’s economy and trade accordingly.

Conclusion

As always, traders are expected to be mathematicians as well as skilled investigators, and with world media each presenting their own narratives that often contradict, it’s not so easy. All the traditional signs for a downturn are present, but not everybody thinks it’s legit.

A recent article from Xinhua News Agency paints a more optimistic picture for China. It reports a robust GDP growth of 5.3% in the first quarter of 2024, which indicates a resilient and growing economy. The article cites several other positive economic indicators, such as a strong purchasing managers’ index (PMI), healthy foreign trade numbers, and a rise in fixed-asset investment. These indicators collectively suggest that China’s economy is stable and possibly showing signs of growth.

But remember, Biases are everywhere, so seeing positive sentiment for China in a Chinese publication is far from surprising.

It’s recommended that you explore every potential asset from multiple sources before adding it to your trading portfolio. Consider using the Exness Trade app to stay current on market prices, get integrated news and signals, and instant access to the markets with the aim to capitalize on forming trends.


This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.


Author:

Paul Reid
Paul Reid

Paul Reid is a financial journalist dedicated to uncovering hidden fundamental connections that can give traders an advantage. Focusing primarily on the stock market, Paul's instincts for identifying major company shifts is well established from following the financial markets for over a decade.