The global economic recovery is losing momentum. A good part of this slowdown in world GDP is due to the ‘crisis’ (if it can be called that) that China is experiencing (Evergrande, energy, production stoppages …), an economy that already accounts for more than 18% of global GDP (in purchasing power parity). The Chinese GDP for the third quarter will be published next Monday, a figure that will focus the attention of the markets. If China stops, global supply chains will suffer.
The ‘Asian giant’ has become the great concern of the markets, which shows that the economic epicenter is increasingly closer to the East and further away from the West. Beijing has to deal with an unprecedented energy crisis while launching a new economic model less reliant on debt and brick. These changes will undoubtedly have significant implications for China and the rest of the world. Some of these implications are already beginning to be visible.
There are several analysis houses that forecast that China’s growth will fall below 5% per year in the third quarter of the year, while prices continue to push up (an explosive combination). This same Thursday it was known that industrial prices (PPI) in China, they posted their biggest rise in September (10.7%) since the historical series began due to the increase in the costs of raw materials, especially coal.
China ‘eats’ its inflation for the moment
For now, companies are cutting margins and preventing this price rise from being passed on to consumers and exports to the same extent. China is ‘eating’ its own inflation in an attempt to remain competitive, but if the factors that are causing this rise in prices are prolonged, the situation will be unsustainable and companies will have to pass this increase in costs to goods and services. services that they produce, which will affect exports (China will export inflation) and also the Chinese CPI. “A widening gap between the PPI and the CPI means greater pressure for the sectors upstream end up shifting rising costs to downstream“said Bruce Pang, head of macro and strategic research at China Renaissance Securities.
This can generate an important problem for developed countries, which are the big clients of the ‘Asian giant’ and that right now are already suffering a strong inflation boom, which also coincides with the slowdown in their economies, as the IMF in its latest forecasts. The word stagflation (low growth and high inflation) sounds louder and louder, while energy continues to rise and supply chains are unable to perform their function.
Scraps in the steel
The situation seems to be getting worse at times. On Wednesday, the Chinese Ministry of Industry ordered to cut steel production at factories in Beijing, Tianjin and Hebei during the winter, the period between November and March. The goal is to reduce emissions to meet Beijing’s environmental targets. This joins the temporary stoppage of other factories that work as suppliers of many products that are exported to the West.
From Pimco they believe that the price increases will come at some point: “After resisting for a while, it seems that China will also raise electricity prices (they are capped by the government) by readjusting the increase cap from 10% to 20%, even for households … In China there will be price increases, but partial power cuts will also be a feature until the end of 2021, with many industries that will see energy reduced between 10% and 30%.
Producer prices skyrocket in China
“We believe that the risk of stagflation is increasing in China as well as the rest of the world, “says Zhiwei Zhang, Chief Economist at Pinpoint Asset Management.” The ambitious emissions reduction target puts persistent pressure on energy prices, which will be passed on to intermediate companies. “.
The measures adopted by Beijing have unleashed an unprecedented energy crisis in the country that is hitting the Asian giant hard. The lack of coal supply and high electricity prices are causing supply cuts in various regions of the country, which will forcibly dampen economic growth and reduce China’s ability to produce everything the world demands.
We must remember the role of China as a ‘factory of the world’. In 2020, the goods ‘made in China’ they accounted for 15% of all world exports, a similar amount to all that Germany, Japan and the Netherlands export together. If the rise in producer prices is transferred to intermediate and final goods, the world will begin to import inflation from China.
JP Morgan analysts warn in their weekly analysis that “Supply shocks are testing China’s policy … China’s growth is slowing dramatically in the last quarter after the end of fiscal and credit supports, while the country’s leaders have recently taken other measures, in particular restrictions on the production of housing and raw materials, which are new obstacles to growth”.
From Natixis they point out that “nevertheless, we expect a strong deceleration in growth in the third quarter, as low as 4.9% year-on-year according to our immediate forecast model, while a fall to 3.2% is expected in the fourth. trimester”.
In this way, China’s economy could become a threat for global recovery through different channels. On the one hand, the slowdown in Chinese growth (the largest contributor to global growth in recent years) and the rise in production costs could affect the global economy through commercial (import) and financial channels. Chinese companies cannot reduce margins forever, so at some point it will begin to export inflation, exacerbating the rise in prices in the US or Europe and putting central bankers in these regions ‘on the ropes’.
On the other hand, but closely related to the above, it appears the energy crisis which is preventing Chinese factories from functioning normally at a very sensitive time for supply chains and with Christmas just around the corner in developed countries. If the ‘factory of the world’ stops, the arrival of goods and inputs (steel, copper …) so necessary for the proper functioning of the West could be in danger.
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